Mario Draghi is halfway through his job and, by the strictest measure of his success, still far from his goal.
The European Central Bank president spent the first four years of his eight-year term battling to keep the euro area intact and winning over opponents to quantitative easing. In the second half of his tenure — if he’s lucky — he might actually meet his legal mandate of price stability.
When he clinks glasses with his Governing Council colleagues on Tuesday at the ECB’s annual reception, two days after his fourth anniversary as the institution’s chief, the 68-year-old may be tempted to take credit for strengthening the currency bloc’s foundations and keeping Greece in the club. If he’s more modest, he might remind himself that slowing global growth and a slump in commodity prices threaten to deny him the successful inflation record boasted by his predecessors.
“They were so focused on ‘whatever it takes’ and peripheral spreads that they kind of missed the fact that there was a business cycle and they were missing the target on inflation,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “If your main target is inflation, and you’ve missed it for the last few years and you’ll miss it for the next few, then that will be a black mark for Draghi’s record.”
It is ironic that Draghi has found himself trying to stave off deflation. The biggest concern, especially in Germany, was that putting an Italian at the top of the ECB would lead to prices escalating.
Inflation has averaged 1.2 percent in the four years since Draghi succeeded Jean-Claude Trichet in November 2011, according to Bloomberg calculations. The Frenchman can look back to 2.1 percent during his tenure, and Wim Duisenberg, the ECB’s first president, managed 2 percent. The ECB’s goal is below but close to 2 percent.
In an interview with Italy’s Il Sole 24 Ore over the weekend, Draghi said his years in office so far have “certainly have been eventful and marked by profound changes to the structure of monetary policy.” He also called the euro area’s situation over that period “extraordinary.”
Draghi’s overriding concern so far has been to protect the 19-nation bloc from a Japan-style protracted period of stagnating or falling prices and declining growth potential.
Yet despite record-low interest rates, long-term loans to banks and a 1.1 trillion-euro ($1.2 trillion) asset-purchase plan, he hasn’t succeeded in returning inflation to the goal. Now, faced with a fragile recovery at risk from weaker global trade, a euro that may be too strong for the economy and the risk of a slump in energy prices, he’s holding out the prospect of another round of monetary easing in December.
That’s when new forecasts will show whether the inflation goal is receding still further. The ECB predicted in September that euro-area inflation would accelerate to 1.7 percent in 2017. The rate was zero in October.
“He should have been more outspoken about the deflationary risk; he downplayed this possibility for too long,” said Guntram Wolff, director of the Brussels-based Bruegel research group. “Communication is an important part of what a central banker has to do.”
Draghi proved to be a master of signaling to financial markets when bond yields spiraled during the sovereign-debt crisis and threatened to rip the euro area apart. His pledge in July 2012 to do “whatever it takes” to keep the single currency together will probably enter history books as “the three most successful words in central-banking history,” according to International Monetary Fund Managing Director Christine Lagarde.
“When it’s an overt crisis and decisions need to be made quickly, and when the political situation is extremely fraught, there are a only a few people who have the skills and the courage to navigate those waters,” said Adam Posen, president of the Peterson Institute for International Economics in Washington and a former Bank of England policy maker. “It’s a good thing and to his credit that the drama is reduced.”
One risk ahead is Greece. After the biggest debt restructuring in history in 2012 only provided short relief, the country won a third bailout package in August and is inching toward a lasting future in the monetary union. Yet the crisis could flare up again amid tight deadlines on spending cuts, pension and tax changes and negotiations on a long-term debt strategy.
Winning German Chancellor Angela Merkel’s support for his policies to protect the euro and stabilize the economy hasn’t shielded Draghi from skepticism and hostility toward his actions in the region’s largest and most populous economy.
“Draghi and his work must be questioned,” said Hans Michelbach, a Merkel ally from the Christian Social Union and a senior member of the German Parliament’s finance committee. “Through his loose monetary policy, his flooding of the markets and his many bond purchases in particular, he has of course caused a considerable loss of confidence.”
Draghi argues that at least part of his activist approach is rooted in member states’ failure to do their part. With a remit that has grown to include banking supervision, and with few visible options left to deliver on his mandate, he’s now calling on governments to deliver structural reforms.
“Other central bankers may resist pressures by hiding behind dogmas,” said former Italian Prime Minister Mario Monti. “Mario Draghi does not need to do so, thus he keeps his powder dry and uses it when some departure from dogma is required by the situation.”