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Mario Draghi really did whatever it took to save the euro
Jul 26th 2017
by Buttonwood
FIVE years ago, Mario Draghi, head of the European Central Bank, pledged to do
whatever it takes to save the euro. At the time, many people were predicting
that the euro zone would break up. But Mr Draghi pulled off the trick; no
countries have left the single currency. Borrowing costs have come down and
even Greece has been able to tap the markets.
Keeping the euro together may have been the aim of the game, but was it worth
it? As M&G, the fund management group, points out, the record has been mixed.
Economic growth has rebounded to a respectable 1.5% year-on-year. This is not
stellar but it is hard for the euro zone to grow rapidly when its population is
ageing; the IMF suggests a greater proportion of older workers may weigh on
productivity growth.
Of course, the euro zone could get more of the current workforce into the job
market; unemployment remains too high. Economists debate whether this is down
to a lack of demand (caused by overly tight fiscal policy) or by structural
barriers such as an inflexible labour market (which creates insiders, who are
hard to dismiss, and outsiders, whom employers are unwilling to hire). Neither
issue has anything to do with the ECB. The bank could be criticised for not
getting inflation up to 2%. On the other hand, if you had told people 10 years
ago that the ECB s balance sheet would be more than 4trn, that it would have
bought government bonds and imposed negative interest rates, few would have
believed you.
The whole exercise has been a remarkable illustration of the power of a central
bank. Does this prove the case of believers in modern monetary theory, who
argue that there is virtually no limit to a government s resources, provided
that it has the support of an independent central bank? It seems a bit early to
say that. First, in the early years of the crisis, commercial banks were
tending to shrink their balance sheets and cut lending; central banks thus
acted to stave off a Great Depression-style shrinking of the money supply. The
policy consequences for governments might be rather different if commercial
banks were indulging in a credit spree. Second, an individual central bank that
rapidly expanded its balance sheet might face the problem of a currency
decline, as international investors became less willing to hold it. But in the
last nine years, all the big central banks have been expanding their balance
sheets, so investors have had no weakling to pick on. That might not be the
case going forward, as America starts to tighten policy.
Voters in Greece or Italy may not feel that Mr Draghi has been that successful,
given the damage done to the former economy and the stagnation in the latter.
What cannot be known is the counterfactual. Had Greece left the euro, citizens
would have probably seen their bank deposits devalued, and inflation and
interest rates soar. Argentina s trials in the early years of the 21st century
are a case in point. There will not be many statues put up to Mr Draghi but he
deserves a fair deal of credit.