Doing ‘whatever it takes’ to sustain the eurozone

Mario Draghi’s successor at the ECB will need to handle the next existential crisis

Wolfgang Münchau

European Central Bank president Mario Draghi will step down later this year

Mario Draghi last week surprised a lot of people, including US president Donald Trump, when he hinted at further monetary easing. But the comment I considered more important was the European Central Bank president’s call for a common eurozone budget as an additional economic shock absorber.

This is two demands folded into one: for a eurozone budget and a cyclical component. European finance ministers have reluctantly agreed to a tiny version of the former, but not the latter. The budget currently under consideration amounts to 0.01 per cent of the eurozone’s gross domestic product. Most member states, except Spain, want the budget to be purely structural — to help countries with economic reforms. The majority categorically rejects any economic stabilisation function. Obviously, you cannot stabilise an economy with 0.01 per cent of anything. So when Mr Draghi calls for a fiscal stabilisation instrument, this is a very, very big deal.

European central bankers have privately favoured such a tool for some time, but wisely stayed out of this political debate. As a parting gift, Mr Draghi has finally chosen to speak truth to power. They will ignore him, of course. But he is right. Without such a budget, the ECB will find it much harder to do “whatever it takes” — the phrase he used in 2012 about saving the eurozone.

This intervention is an inconvenient demand on EU leaders in countries where the entire eurozone debate is reduced to finger-wagging about fiscal discipline, and where politicians and economists conflate the reasonable demand for a eurozone budget with an unreasonable demand for cross-country transfer payments. An additional element of the debate in Germany is a universal condemnation of the ECB’s monetary policies.

EU leaders do not wish to touch fiscal stabilisation because it opens up all sorts of unpleasant follow-on discussions. A large budget will eventually require a eurozone bond — a safe asset. National government debt would then lose its cherished sovereign status and be reclassified as subsovereign. The ECB would rely less on national bonds for monetary policy operations, and more on eurozone debt. It would make it easier for member states to default, and possibly harder to raise new debt.

A fiscal stabilisation facility would turn everything we have known about the eurozone upside-down: its stability rules, legal procedures and, most important of all, ideological beliefs about what monetary and fiscal policies should do and how they should interact.

History has taught us that EU leaders never act unless a crisis is upon them — and even then their actions are usually insufficient. The one forecast I am willing to make is that the eurozone’s next existential crisis will fall into the eight-year period of office of Mr Draghi’s successor. I have no idea who this will be. I am not even sure this is the most important question for the eurozone right now. Mr Draghi’s great achievement was to have saved the eurozone. But it would be a logical fallacy to make a bailout mindset part of the job description.

The question EU leaders should be asking is not whether Mr Draghi’s successor should be a short man from the north or a tall woman from the east. They should instead focus on what they can contribute to make it possible for the next ECB president to act as Mr Draghi did in 2012.

Mr Draghi saved the eurozone from an all-out speculative attack by designing a programme of unlimited bond purchases. This guarantee, also known as outright monetary transactions, was tailor-made to the situation at the time. It was indeed unlimited, but the discussion often overlooks the fact that it was also conditional. Back in 2012, Mario Monti, a non-partisan technocrat and previously a European Commissioner, was Italy’s prime minister, backed by a de facto grand coalition of centre-right and centre-left parties. If today’s Italian government, which is of a completely different complexion, were to provoke a financial crisis with a rule-busting deficit or a parallel currency, OMT would be useless. The ECB cannot just decide to buy Italian bonds.

The next ECB president will have a tough job. Inflation expectations have decoupled from the target and the bank does not have much ammunition left. In theory, the ECB could buy another €2tn worth of government debt. But this will get progressively harder. There are not many German, Dutch and Finnish bonds available to buy these days. One of the many reasons the eurozone requires a safe asset is to give the ECB something to buy.

We will know that the eurozone has finally reached sustainability when EU leaders can safely appoint a bad central banker. It is too early to to test that proposition, but high time to do “whatever it takes” to make such an experiment possible in the future.

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