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Draghi steps down, but the debate on soft money and how to prop the Euro-zone economy remains unchanged

Friday, October 25th 2019 - 09:40 UTC
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“If there is one general thing I'm proud of, it's the way in which the governing council and myself have constantly pursued our mandate” of price stability “If there is one general thing I'm proud of, it's the way in which the governing council and myself have constantly pursued our mandate” of price stability

Departing European Central Bank president Mario Draghi said on Thursday the proudest legacy from his eight-year term was the ability to “never give up” in the face of economic crises, internal dissent, and external criticism.

“In a sense, this is a part of our legacy: never give up,” Draghi said at his final press conference in Frankfurt of his work with colleagues on the ECB governing council since 2011.

“If there is one general thing I'm proud of, it's the way in which the governing council and myself have constantly pursued our mandate” of price stability in the 19-nation Euro-zone, the 72-year-old added.

Draghi defended his ultra-easy monetary policy stance as his tenure at the bank closes in exactly the same place he started - trying to prop up a perpetually ailing currency bloc.

With growth barely holding in positive territory and the outlook darkening, it was hardly the grand finale hoped for by Draghi, whose 2012 promise to do “whatever it takes” to save the euro - code for rescuing heavily indebted countries - is credited with saving the shared currency from collapse.

With inflation languishing at less than half the ECB's target and little hope for a speedy rebound, Draghi even kept the door open to more stimulus, days before he hands the reins to new ECB chief Christine Lagarde.

Despite weak growth across the euro zone, Draghi insisted the benefits of loose money policy far outweighed the risks and rejected the suggestion that a public split with policy hawks in the bank had tainted his legacy.

“I feel like someone who tried to comply with the mandate in the best possible way,” Draghi, whose term has passed without a single interest rate hike, told a news conference.

“These disagreements are often made public and often they are not, so ... I have taken this as part and parcel of the ongoing debate and discussions.”

While acknowledging that the bank was keeping a close watch out for any unintended consequences of ultra-low and negative interest rates, he added that they had clearly stimulated the economy through higher lending and helped boost employment.

“For us it has been a very positive experience,” he said.

Asked what advice he had for former International Monetary Fund chief Lagarde, who attended but did not participate in Thursday's meeting, he said “no advice is needed”.

“She knows perfectly well what she has to do.”

At Thursday's meeting, the ECB kept its benchmark deposit rate unchanged at minus 0.5 per cent. It also reaffirmed that its open bond purchases will start in November, at a rate of 20 billion Euros per month and will run “as long as necessary”.

Turmoil within the ECB is likely to persist and Lagarde will have to deal with objections that Draghi's policy of sub-zero deposit rates and massive bond purchases are hurting savers, squeezing banks and pension funds and inflating financial bubbles, while doing little for inflation.

And it's not just a few prominent hawks - including the central bank governors of Germany, the Netherlands and Austria - who question the wisdom of resuming the bond-buying program.

Seeking to buy time, Lagarde has promised a review of the bank's “monetary framework”, likely to mean its policy goals and tools, similar to a review now being conducted by the US Federal Reserve.

The problem for the ECB is that some of the major factors depressing prices are outside its control. These range from demographic and technological changes to the euro zone's reliance on exports, in particular by German manufacturers, which leaves it bearing the brunt of a global trade war.

With the ECB's firepower now largely spent, Draghi and his successor are likely to continue urging governments that are running a surplus, such as Germany and the Netherlands, to invest more to generate economic growth at home.

But latest budget figures, showing only a modest expansion, suggest their calls are likely to be frustrated for now.

 

Categories: Economy, Politics, International.

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