By Canadian Press

Outgoing ECB chief defends legacy against stimulus skeptics

Oct 24, 2019 | 10:12 AM

FRANKFURT — Mario Draghi ended his eight-year term as head of the European Central Bank by defending his most recent stimulus package and reminding that the eurozone is now in better shape than during the days when the Greek crisis threatened to break it apart.

Draghi resisted extensive reminiscence about his term at his last news conference. He downplayed the recent and unusually public criticism from a minority of the 25-member governing council members after the bank decided Sept. 12 to re-start bond purchases with newly printed money.

The stimulus is meant to revitalize the economy but critics worry it should be saved for more serious downturns and can distort financial markets, increasing risks down the line.

Draghi said that criticism of the stimulus was “part and parcel of the ongoing debate.”

“We have discussions, everybody has discussions,” he told reporters after presiding over the last policy meeting at the ECB before former International Monetary Fund head Christine Lagarde takes over Nov. 1.

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He was asked to look back at the Greek crisis that was raging when he took over as president in 2011, when many investors were speculating about the end of the euro due to a government debt crisis.

Draghi praised Greece and its people for the painful progress in righting the country’s finances and economy since it almost crashed out of the eurozone in 2010-2012 and then again in 2015. Greece was recently able to sell government bonds at negative interest rates, in part due to the ECB’s stimulus efforts that drove down borrowing costs.

“The main efforts have been done by the governments and the Greek citizens who had to pay a high price,” he said. “It is a good time for Greece, and compared to three or four years ago, it’s a good time for Europe, for the eurozone countries.”

It was during the depths of the crisis in 2012 when Draghi uttered the words that are credited by many with turning around the economic fortunes of the euro. He told a conference on July 26, 2012 that the ECB will do “whatever it takes” to save the currency. The vow, backed up weeks later by a promise to buy unlimited amounts of government bonds if needed, calmed volatility in bond markets.

Draghi says the bank’s stimulus measures also helped create some 11 million new jobs since the peak of eurozone unemployment in 2013.

Yet Draghi kept answers short to questions about his time in office, saying that his legacy would be how he and the other council members resolutely pursued the bank’s mandate to keep inflation steady. “This is something we collectively can be proud of.”

Doing so has meant pushing more and more monetary stimulus into the financial system as inflation has remained stubbornly below the bank’s goal of just under 2% considered best for the economy. It was an annual 0.8% in September.

In his last days in office, Draghi has faced unprecedented pushback from among the bank’s own officials against the stimulus moves announced Sept. 12.

At that meeting, the bank cut the rate on overnight deposits from banks to minus 0.5% from minus 0.4% and announced 20 billion euros ($22 billion) per month in bond purchases starting Nov. 1 and lasting indefinitely. It also said rates will stay at current lows until things have definitely taken a turn for the better.

The heads of central bank from the Netherlands, Germany, and Austria openly questioned the decision, and a German member of the bank’s top leadership who had opposed the bond stimulus as premature resigned after the meeting without publicly stating a reason.

Draghi said that weak economic data since the September meeting proved that the decision to add stimulus was the right one. The eurozone economy has slowed sharply amid uncertainty over the U.S.-China trade dispute and the terms of Britain’s eventual departure from the European Union.

At the Sept. 12 meeting, a minority opposed the bond purchases, which are a way of using the central bank’s power to print money and push it into the financial system. The purchases lower long-term market interest rates to make credit more affordable for businesses.

Opponents say such purchases should be held back for a more serious crisis, and that they wind up supporting financially weaker governments through cheaper borrowing costs, lowering incentives to make politically difficult choices to close deficits and strengthen growth.

There is also the question of how much more good they will do when interest rates are already very low. Large parts of the eurozone government bond market trade at negative interest yields, meaning governments get paid to borrow. The ECB already pumped 2.6 trillion euros ($2.9 trillion) into the economy in an earlier bond-purchase program that ended at the close of last year.

David McHugh, The Associated Press