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Five years of Super Mario - The euro s obituaries were premature

2017-08-01 11:42:18

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.