Draghi perches nicely on both sides of the fence

“Men who can be right and sit tight are uncommon.” Coined by Wall Street trader Jesse Livermore, this saying works as well with monetary policy as stock market speculation. Even when events pass just as intended, the central banking mentality is to seek out problems. Much of the time their investigations should leave policy exactly as it was.

Such is the situation in which Mario Draghi finds himself. The president of the European Central Bank is no stranger to dilemma. Credited with rescuing the eurozone from meltdown, his promise to backstop government debt risked the ire of Europe’s largest economy, Germany. Every week brings closer an excruciating choice between the integrity of his balance sheet and the financial survival of Greece. But what is pleasantly absent from Mr Draghi’s current worry-list is that staple of central banking: balancing growth against inflation.


Twice in the formative years of the euro, Jean-Claude Trichet reacted to high inflation by raising rates, only to reverse course when Europe tipped into recession. His successor is spared a similar quandary. Europe is recovering again, but this time inflation remains negligible. France and Italy, two of the continent’s laggards, are each growing well; at 0.6 per cent, France last quarter handily outpaced Germany, whereas any growth is greeted with prosecco in Rome. Even Greece, while once more in recession, shrank less than expected. Its government is quietly registering a rising primary surplus on its accounts.

In a speech this week Mr Draghi credited the monetary warmth emanating from his bank for coaxing out these green shoots. The past 12 months have seen the ECB deploy cheap loans and conduct a stringent examination of bank balance sheets, which together have boosted the credit supply. As global deflation took hold last autumn, Mr Draghi prepared the ground for quantitative easing, and this year began to deliver a trillion euros of QE. In his view, the improving economy shows that monetary policy loses little of its potency when interest rates are low.

Yet, like the central banker he is, Mr Draghi could not resist raising some oft-heard criticisms of QE, if only to head them off. The critics — often while denouncing it as ineffective — warn that sustained monetary ease causes a misallocation of resources. In plainer English, markets respond to cheap money by no longer distinguishing solid investments from reckless gambles. Prices are pushed ever higher by the press of funds, incubating a future crash. Such Cassandras see this month’s switchback ride in the bond market as evidence of how the ECB is playing with fire.

The other charge is that QE has potent distributional consequences. By raising this Mr Draghi treads on difficult ground. Last month he was showered with paper by a protester accusing the ECB of “autocratic hegemony”. When its policy actions are measured in the hundreds of billions, any hint that they may reward one section of society over another could undermine central bank legitimacy.

But neither concern should divert the ECB from restoring stable growth to the eurozone. Having gained an array of “macro prudential” tools, there is no call for it to slow the economy just to smother financial risk. If an uneven distribution of wealth hands the rich a windfall from easier monetary policy, it is for governments to mitigate the consequences. More than expensive asset prices, high unemployment is what poses the greatest risk to Europe’s poor. Mr Draghi is right to sit tight and keep the monetary spigot open.




Editorial do FT