Eight years after he took over from Jean-Claude Trichet, today Mario Draghi held his last Governing Council meeting before Christine Lagarde takes over on 1 November. Draghi leaves Europe in a recession, the ECB without ammo, a wealth divide unlike any seen since the Great Depression, and his successor facing an unprecedented revolt across the ECB’s governing counsel.
In short, his legacy is nothing short of catastrophic, although his advocates will quickly chime in: he managed to kick the can for 8 years. Well, he sure did, and in the process made the accumulated imbalances, and the coming crisis, that much worse.
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During his 8 years in charge, the Euro Area eventually emerged from a period of sovereign debt crises and saw unemployment drop to 7.4%, its lowest since May 2008. However, inflation proved too stubborn to return to target (averaging 1.19% over the period), standing at just +0.8% in September, while five-year forward five-year inflation swaps standing at 1.202%, just shy of all time lows…
… so, as DB’s Jim Reid notes, “not exactly a vote of confidence from the markets that they expect the ECB to get inflation back up again anytime soon.”
Another remarkable achievement, or lack thereof, is that unlike Yellen or Powell, Draghi was never able to raise rates during his term, instead pumping ever-more liquidity into the financial system as he fought one crisis after another, while making the rich richer, resulting in Europe’s biggest wealth divide in history.
According to Bloomberg, Draghi will be remembered for his pledge to do “whatever it takes” to save the euro during the regional debt meltdown in 2012. Perhaps, but while Europe’s sovereign debt crisis is virtually assured to return, one thing that will never “normalize” is the ECB’s balance sheet, which in our view, is Draghi’s true lasting legacy. Under the Italian central banker, the ECB expanded moral hazard to an art form, setting a price guarantee not only for government bonds but also backstopping corporate debt. The result: the ECB balance sheet has hit level that can never be unwound without triggering a new crisis.
Seen in this light, in addition to “whatever it takes”,