Opinion | Hold those hagiographies of Mario Draghi as ECB chief4 min read . Updated: 18 Mar 2019, 11:07 PM IST
Journalists are in a hurry to bestow greatness on a central banker with a flawed monetary policy
There is something very strange about journalists, living in the “here and now" and covering events as they unfold, trying to write judgements of history. That is what, in recent days, journalists writing for the Financial Times have been doing with respect to Mario Draghi. The president of the European Central Bank (ECB) is due to retire by November 2019. Many appear to be showing undue haste in cementing his place in history. Anxious to establish facts on the ground and to claim the “first-mover advantage", journalist Claire Jones wrote (The ECB After Draghi: ‘You Need An Actor Who Can Act Fast’) in the Financial Times on 13 March that the Eurozone needed a leader who could act fast, with the subtext being that Draghi did just that in 2012. He is credited with having acted boldly to save the Eurozone.
The reason it is strange to find journalists attempting historic judgements is that their assessment could be too transient. They risk being overtaken by events sooner than they think. In February 1999, Time magazine featured on its cover Robert Rubin, Larry Summers and Alan Greenspan, calling them the “Committee to save the world". One year later, information technology stocks peaked and the bubble of the Nasdaq Composite index burst. Both ended the much-touted American productivity miracle which has not made a reappearance since then.
Robert Rubin came from Goldman Sachs to the US Treasury and, from there, he went to Citigroup and lost much of his credibility. Larry Summers did not really set the Potomac on fire with policy decisions but nonetheless found himself on the Time cover. Alan Greenspan admitted a flaw in his model after the 2008 financial crisis and then retracted some of his admission. Therefore, based on the Draghi hagiographies that are appearing, it might be a good long-term decision to “sell" Draghi.
Second, a historical judgement must consider contrarian evidence and explain why it matters less. For example, on 11 February, Robert Smith wrote in the Financial Times (Europe Faces A Reckoning As ‘The Bezzle’ Bites QE) that the monetary stimulus of the ECB had led to a period of psychic wealth generation that was now unravelling. The article mentions three bonds that lost half to two-thirds of their value within months of the ECB buying them, and another one went from raising money in the bond market in 2017 to defaulting in 2018. Who bears losses incurred by the ECB on such bonds?
In an era of “fiat money", perhaps they are not really losses because the central bank printed money and bought them. Nonetheless, money is fungible; it has alternative uses and ECB’s purchase of these bonds amounted to a transfer of public resources into private hands. In democracies, one would expect an inquiry into such purchases and such a probe might even result in the resignation of the head of the central bank. But in Europe, members of the European Parliament were jostling to take selfies with Draghi.
Further, one should question the efficacy of Draghi’s bold rescue acts if, within months of his promise to declare them unnecessary, the Eurozone economy is gasping for oxygen. In other words, if a patient fell sick (again) immediately after the medicine was withdrawn, then did the medicine leave the patient better off or did it render him worse off?
The response to this would be that Draghi’s monetary medicine would have worked better had it been backed up by structural reforms and fiscal stimulus across the Eurozone. However, a good doctor would have to factor in the circumstances and probability of such follow-up action being taken and, second, the costs and benefits of his medicine if these actions were not taken. Did the ECB, under Draghi, do that?
German newspapers and commentators have linked the ECB’s monetary policy approach to the rising spread of nationalism, populist but ultimately unviable and unsustainable economics, and rising inequality in Europe. They have a point. The central bank’s policies have boosted debt and asset prices. Unfortunately, both of them are not part of the same balance sheet. Some have become more indebted and others have become wealthier. The fact that prices of financial and real assets have recovered while economic recovery has floundered means that employment and incomes have not risen as much as wealth.
By misjudging the secular decline in potential growth as a secular stagnation or deficient aggregate demand, monetary policy has exacerbated the problem. The former requires acceptance of lower growth, some redistribution through higher taxation and targeted relief for bottom quintiles of the population. Instead, monetary policy has damaged the economy’s ability to generate and sustain spontaneous growth and has made it permanently dependent on monetary medicine. Draghi’s monetary policy is thus part of the problem. Documenting history serves a useful purpose for the future. Writing hagiographies, however, does a disservice to both the present and the future.
These are the author’s personal views.
V. Anantha Nageswaran is the dean of IFMR Graduate School of Business (KREA University).