THE MAN WHO SAVED THE EURO
MARIO DRAGHI: ACHIEVED THE IMPOSSIBLE
While the Eurozone is on the verge of collapse, and the world is curiously looking for answers to the question of “what will happen now?”, President of European Central Bank Mario Draghi said, “We will take whatever it takes to save the Euro*” and put his stamp on history.
6.5 years ago, Mario Draghi, President of European Central Bank, delivered a speech and rescued the monetary union on the verge of collapse due to its heavily indebted members. The most important aspect of that historical conversation was the three words that changed the course of events; Whatever it takes...
The crisis was at the peak, the stock exchange was falling down, the bond interests of the euro member countries were increasing, the economies in the south of the euro area were on the verge of collapse, and the institutions could not take action together, so the disaster was approaching rapidly.
It was said that the Eurozone was scattering and Mario Draghi said in his speech on June 26, 2012, “Within the scope of our responsibilities, the European Central Bank (ECB) will do whatever it takes to protect the Euro and the necessary steps will be taken quickly. And believe me, it will be enough.”.
DRAGHI’S OUTSPOKEN DETERMINATION
Markets responded immediately to Draghi’s outspoken determination, after a week the ECB announced it would purchase bonds from the oppressed countries. The Bank did not purchase bonds for a long time, and bond purchase that boosts the markets provided liquidity to the markets, as well as to the economies, and allowing those who wanted to sell their bonds and leave.
However, the crisis in the euro zone did not stop. Greece, followed by Ireland, Spain and Portugal announced austerity and financial stability program. In the Eurozone, unemployment rose to 12 percent, while the average debt to
GDP ratio rose to 92 percent. While the stagnation in Germany and France deepened, unemployment among young people in Spain reached 56 percent and 25 percent in the eurozone. The ECB once again stepped in and the benchmark interest rate was reduced to 0.25 percent in November 2013.
In a statement in May 2014, Mario Draghi announced that the ECB would seek a larger monetary expansion to stop deflation and revive the economy by triggering demand. In March 2015, with one of the largest financial expansion programs in the financial history, the ECB announced that it would purchase 60 billion euros in bonds each month. The monetary expansion program continued to be 80 billion in 2016, 60 billion in 2017 and 30 billion dollars in 2018.
HE ACHIEVED NEGATIVE DEPOSIT INTEREST
Draghi, on the other hand, took a step
While implementing one of the unprecedented financial expansion programs of financial history, Draghi pulled interest rates to zero and took the Eurozone off the cliff.
The boss of the Euro achieved the impossible and boosted the Europe. However, the risk of stagnation makes us scared again and we are curious about the weapons that Draghi will draw.
forward to stimulate the economy on the interest front, and in March 2016, he lowered the the ECB benchmark rate to zero and the base deposit rate to minus 0.4. In this way, he aimed to inject money into the markets, revitalize the economy, real estate markets, and end the ongoing deflation in the eurozone.
Under the influence of the ECB led by Draghi, a revival in the Eurozone started and a switch from a negative growth from a positive growth was captured. In 2017, economies turned into a period of growth, while Greece was returning to financial markets. Unemployment in the eurozone fell to 9.1 percent after 9 years.
In the middle of 2017, growth and inflation forecasts were raised and new employment areas were created. The chief editor of the Guardian newspaper, Larry Elliott, said, “The pro-European boss of the European Central Bank has succeeded in achieving what is impossible, and the Eurozone economy is on its track again.”
ULTRA LOOSE MONETARY POLICY; PAINKILLER
In her article written in the middle of 2017, Larry Elliott noted that ultra-low interest rates and monetary expansion led to the creation of five million new jobs in the euro area for 3.5 years, most of which were part-time and low-quality temporary jobs, and that inflation still remained low. Elliott wrote that “the ultra-loose monetary policy is not the
medicine, but the painkiller”.
In June 2018, Mario Draghi said the monetary expansion would end at the end of the year, but interest rates would remain record low for a long time. In December 2018, the European Central Bank ended the four-year monetary expansion program.
Starting in 2015, the ECB made a purchase of a total of 2.6 trillion Euros, expanding its balance sheet, created monetary slack and aimed to keep the markets alive with record low interest rates. The monetary expansion program has contributed 0.75 percentage points to the 2.25 percent annual growth of the euro area since 2015.
MEASURES AGAINST THE STAGNATION RISK IN 2009
At the beginning of 2019, Draghi again faced increasing risks. The danger of a slowdown in Europe turning into stagnation has led to calls for a proactive chairman to take measures to accelerate the economy.
As the euro area grew by 0.2 percent in the third quarter of 2018 and 1.6 percent on an annual basis increased concerns. This figure was the lowest after the second quarter of 2014. The growth rate of 0.7 percent in 2017 was over.
The Eurozone is expected to decline to 2.1 percent in 2018 after a 2.4 percent growth in 2017. According to IMF estimates, growth in 2019 will be 1.8 percent and it will fall to 1.6 percent in
2020. The biggest economy of especially the bloc, Germany is expected to grow 1.5 percent in 2018 after 2.2 percent in 2017. This rate is the lowest since 2013.
CRITISIM ON NO MONETARY POLICY WEAPON LEFT
The European Central Bank did not take any steps at the first meeting of the year. Draghi, in a press conference after the meeting, warned of the risk of decline in growth due to external factors. He listed these risks as geopolitical elements, threat of protectionism, vulnerabilities in emerging markets and fluctuations in financial markets. Draghi said interest rates will remain record low until summer 2019, and this period will be extended if necessary.
Draghi has been criticized for a while, with no other monetary policy weapons left, and his ammunition is over. Draghi answered at the next press conference of the ECB that he did not agree with the criticism that he had no weapons left to tackle the recession.
Draghi said that the monetary perspective is not the end of Europe’s ammunition, interest rates are at the lowest of all times, monetary expansion program is over, the central bank and governments have other weapons. However, Draghi did not say what these options were.
WHO WILL TAKE HIS SEAT?
On the other hand, Draghi’s term of office expires in October, which fuels the debates on who will take his seat. Undoubtedly Germany is always the most effective force in this regard. Draghi also became president with the support of Germany. German Chancellor Angela Merkel allegedly wants to bring Jens Weidmann, chairman of the German Central Bank.
Erkki Liikanen, former head of the Bank of Finland, is one of the prominent names for ECB Presidency. Other candidates include Francois Villeroy de Galhau, head of the Central Bank of France, and Philip Lane, leader of the Bank of Ireland.