‘Whatever it takes’, ten years on

A decade ago Mario Draghi helped save the euro and the EU. Yet the lessons have still fully to sink in.

On July 26th 2012, at a conference in London, the then president of the European Central Bank, Mario Draghi, uttered three words which were to change the course of monetary policy and allow the European Union to navigate beyond the turbulent years of the sovereign-debt crisis. It was a rare case of a top policy-maker single-handedly redirecting economic development—for the better—with a simple public statement.

Europe today is just emerging from two years of a devastating pandemic and faces the fallout from war in Ukraine and escalating economic warfare. Yet the tenth anniversary of Draghi’s intervention has been marked by the current leadership of the ECB reversing the direction he had set, by ending ‘quantitative easing’ and increasing the interest rate by half a percentage point. Meanwhile, in Draghi’s native Italy, three political parties in the governing coalition he latterly led—the Five Stars Movement (5SM), the Lega and Forza Italia—have irresponsibly pulled the plug on his premiership.

Mortal threat

‘Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,’ Draghi said ten years ago, addressing an audience of investors. This statement alone helped stabilise the single currency and most likely also the EU: the currency was under mortal threat due to bad original design and mistaken decisions, before and during the eurozone crisis.

There had been widespread speculation in London and other global financial markets about the possible collapse of the euro. Interest rates on government bonds peaked at around 7 per cent in Italy, France and Spain and around 15 per cent in Ireland, Portugal and Cyprus, even exceeding 35 per cent in Greece. The EU was unable to act without the International Monetary Fund being part of the picture, but jointly implemented austerity programmes not only pushed the euro area into the vicious circle of recession but also gave rise to large-scale discontent and Euroscepticism.

At first, for many, it seemed (stereotypically) a ‘Greek crisis’. After the collapse of the banking sector in Ireland and the quasi-bankruptcy of Portugal, however, Spain as well as Italy came close to financial breakdown. That the union faced a systemic crisis became all too obvious and in June 2012 the European Council launched the work on what was to become the four presidents’ report (by the heads of the council, the European Commission and the Eurogroup, as well as Draghi). This document represented a moment of truth, opening the door to banking, fiscal and political union.

Markets tranquilised

Against the backdrop of this unfolding political U-turn, Draghi’s intervention was sufficient to tranquilise markets and signal to speculators they should not bet against euro-area stability. But his words, however powerful, did not turn the trick alone.

In the following weeks, the ECB developed concrete plans to purchase, via secondary markets, the bonds of countries which signed up for conditions through its Outright Monetary Transactions programme. As distinct from the previous Securities Market Programme, Draghi designed a policy with potentially no size and no time limit. It was meant to safeguard ‘an appropriate monetary policy transmission and the singleness of the monetary policy’, according to the ECB.

Two other policies implemented before and after ‘whatever it takes’ speak volumes about the ability of Draghi and the ECB to achieve a clear objective—preserve the euro—with innovative, sound solutions. Long Term Refinancing Operations kicked in at the beginning of 2012, offering three-year loans at 1 per cent to banks which seized the credit opportunity, with governments benefiting indirectly from their higher lending capacity. And quantitative easing began in 2015, within six years rolling out almost €2.95 trillion.

Monetary policy had to shoulder so much from 2012 because other elements of a sustainable monetary union—most importantly, a central fiscal capacity to help deal with asymmetric shocks—were missing and indeed not even seriously considered for a very long time. Draghi had to stretch the powers of the ECB to the maximum to save the euro. But he also demonstrated that monetary policy cannot be the sole macroeconomic lever, especially in times of high deflationary risk.

Fiscal architecture

Over the last decade, very little has changed in the core of EU economic governance, particularly within the fiscal architecture. The European Stability Mechanism exists as a credit line to avoid default but not under community law. No common fiscal capacity has so far been created for the euro area. The NextGenerationEU recovery package is a major innovation but it is temporary. It’s the same with SURE, the employment-protection instrument, which has not become an automatic buffer against further exogenous shocks.

We have seen the creation of a banking union, whose significance should not be underestimated. But even there only two-thirds of the initial plan has materialised, with European deposit insurance still facing political barriers.

Within two months of the pandemic shock, the EU found the right policy direction and we often hear that it has managed this crisis much better than that of ten years ago. Yet all the lessons learned by muddling through the different crises over the last decade have not been framed in a new set of common rules. The vulnerability of economic and monetary union (EMU) requires a permanent solution.

The scope of the measures moreover remains too small. NextGenerationEU is a start but to respond to all expectations when it comes to delivering European public goods—defence, food, energy, security, climate, digital, jobs—much greater capacities would need to be considered. And new common instruments are required to equip EMU and the EU with a proper counter-cyclical function, not only a focus on mid- and long-term investment.

Best choice

When Covid-19 pushed Italy into another domestic political crisis, with his background as a major European leader Draghi was the best choice to lead the government till the end of the legislature. His mission was time-limited but clear: address the health crisis and the associated socio-economic crisis, managing and making use of the new EU funds to best effect. But Draghi’s extra-wide government coalition was put to a sudden test this month by the 5SM, confronted with bad results in local elections and looking for a new line and greater influence.

With the budget law to be issued in the autumn and 55 policy objectives to be met by December to maintain access to the EU Recovery and Resilience Facility, the move by the 5SM seems irresponsible at best. While it is pointless to try to explain why the party, followed by the Lega and Forza Italia, could not wait eight months for an election, the end of this government of national unity also comes at the expense of potential reforms of EMU.

Without Draghi at the helm, Italy will find it harder to convince others of the need to work together towards a common fiscal capacity, common counter-cyclical measures and other policies that could prevent divergence and reduce the risk of disintegration.