Mario Draghi's legacy as ECB President

Published on Die Achse des Guten and The Conservative

Mario Draghi's last months as President of the European Central Bank have been tumultuous. He managed to push through more bond purchases or "quantitative easing" on 12 September, despite the fact that Central Bank governors representing a majority of eurozone economic output opposed it, also because it was “open-ended”, without a time-limit. Not only was there open opposition by German and Dutch Central Bankers, but also France's Central Bank chief resisted. The ECB’s monetary policy committee had also advised against restarting QE, arguing long-term interest rates were already low.

Only days later, a prominent German ECB official, Sabine Lautenschlaeger, resigned, while two former German ECB chief economists, along with former heads of the Central Banks of Germany, Austria and the Netherlands, criticised Draghi's record in a new publication.

Remarkably, also German tabloid Bild waded into this otherwise rather technical debate, depicting Draghi with “dracula teeth” as "Count Draghila”, mentioning that “we have lost billions because of him”. 

Also governments waded in. Belgium’s Finance Minister warned the ECB’s policies hit savers and increase inequality. Ahead of the decision, the Dutch government had stated that these “suppress” interest rates, with the Christian democratic coalition partner even accusing the ECB of endangering Dutch pensions, which have had to be cut due to ongoing low rates, further questioning whether the ECB is respecting its mandate.

Draghi and his acolytes have been denying all accusations, arguing that interest rates are low amongst others due to ageing. Research by Claudio Borio, the top economist of the Bank for International Settlements, the "Central Bank of Central Banks,", has however demonstrated that "the decline in real interest rates over the last 30 years is not explained well by non-monetary factors but monetary policy seems to play a more significant role".

The ECB has been using various methods to keep interest rates low. Apart from its general interest rate setting policies, whereby it also set negative rates, and “Quantitative Easing”, which amounts to creating new money, which is then used to buy bonds, including government bonds issued by Eurozone governments, it has been lowering collateral requirements for banks in Eurozone countries to receive financing from the ECB.

When interest rates decrease as a result of this kind of manipulation, even if this is also partially the result of natural, “non-monetary factors”, the benefactors are excessively indebted governments that have a hard time refinancing their debt. At least in Zimbabwe things are more honest, with the Central Bank paying out subsidies directly with printed money.

There is no such thing as a free lunch, however, so someone has to bear the cost. David Folkert-Landau, the chief economist of Deutsche Bank estimates that negative interest rates, amount to an annual tax on Eurozone savings equal to 160 billion euro. Not very democratic, given that Parliaments have no say over this kind of “inflation tax”. Historically, central banks have been used to finance when taxpayers would refuse to pay for, most notably war, which is why the Bank of England was set up, but nowadays runaway welfare spending.

Of course central banks in the U.S., Japan and the UK engage in similar practices, but tellingly, Greece, a country with a debt burden that would be unsustainable without external Eurozone and ECB support, currently pays less to borrow over ten years than the United States, whose currency underpins the world economy. Greece now also enjoys negative rates, meaning investors pay the Greek government for the privilege of lending to it. This makes clear how far the ECB has gone.

The official line of the ECB is that we need all this to “achieve” a 2 percent inflation target. Originally, this was interpreted as a maximum limit, but somehow the ECB gets away with reinterpreting this as a goal to achieve. As if anyone aims for their investments to lose 2 percent per year.

It’s not only an issue however that savers are hit or that asset prices are distorted, given that people buy hard assets to avoid debasement of their savings. Some countries are also hit worse than others: Belgium has a lot of savings, the Netherlands a lot of pension funds that are banned from taking big risks, while a relatively low percentage of Germans own real estate. These are all reasons to be hit worse. Just like fiscal transfers, these monetary transfers ultimately also threaten the Eurozone, as they create more disunity: those having to pay aren't happy and those haven't to accept conditions linked to the payments aren't.  

Politically attached conditions linked to monetary action have already been a thing in the Eurozone, as the ECB has been sending various letters to governments with instructions in the past, suggesting otherwise monetary support may end. With the arrival of Draghi’s successor, Christine Lagarde, who’s a politician, an even more politicized ECB can be expected. A few days after Lagarde’s nomination, the French government watered down its commitment to trim the country’s bloated ranks of civil servants, in a sign how all that easy money does not enable space to reform, but instead provides an incentive to avoid reform. Politicising the central bank will in any case not change the fact that there is insufficient political unity underpinning the Eurozone. The clearer the effects of the ECB’s policies become, the more evident this is.