European Central Bank chief Mario Draghi, whose vow to do “whatever it takes” is seen as a turning point in the eurozone’s debt crisis, presided over his last policy meeting Thursday amid unusually strong internal opposition to the latest stimulus package that will be part of his legacy.
The bank’s 25-member governing council made no changes in interest rates or the bank’s bond-purchase stimulus after announcing an array of measures Sept. 12.
The meeting at the bank’s skyscraper headquarters in Frankfurt, Germany was attended by Draghi’s designated successor, former International Monetary Fund head Christine Lagarde, who takes office Nov. 1 after being chosen for the post by eurozone governments.
The defining moment of Draghi’s eight years in office was his statement on July 26, 2012 that the ECB would “do whatever it takes to preserve the euro, and believe me, it will be enough.” That vow, backed up by a promise to buy unlimited amounts of government bonds if needed to lower excessive borrowing costs, has been widely credited with calming financial market pressure on indebted governments such as Italy and thereby rescuing the currency union from disaster.
Yet Thursday’s news conference may focus on more current issues.
In his last days in office, Draghi has faced unprecedented pushback from among the bank’s own officials against the latest stimulus moves announced Sept. 12. The bank cut the rate on overnight deposits from banks to minus 0.5% from minus 0.4%, announced 20 billion euros ($22 billion) per month in bond purchases starting Nov. 1 and lasting indefinitely, and said rates will stay at current lows until things have definitely taken a turn for the better.
The central bank heads from member countries the Netherlands, Germany, and Austria have 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 himself made it clear that the package would need help from some governments to spend more on things like infrastructure — a call that has not been met with a resounding response from eurozone leaders.
The September measures were “highly controversial” and “whether they will make any difference remains to be seen,” said economist Florian Hense at Berenberg bank. “Draghi will want to make the point that, despite some differences, the Governing Council members agree on many points.”
Public criticism from the council minority can undermine market confidence that the central bank has the resolve to see its efforts through, or to add new ones if circumstances demand. “That some factions within the ECB Governing Council have aired their opposition to the September decisions so forcefully and publicly could weigh on the efficacy of the package,” Hense wrote in a research note.
The eurozone economy is slowing amid uncertainty over the U.S.-China trade dispute and the terms of Britain’s eventual departure from the European Union. Despite massive stimulus over the past several years, inflation of 0.8% annually remains stubbornly below the bank’s target of just under 2% considered best for the economy.
The written account of the Sept. 12 meeting released earlier indicated that all members agreed that some form of stimulus was needed. But 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, thereby 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.
Draghi has credited the bank’s stimulus measures with creating some 11 million new jobs since the peak of eurozone unemployment in 2013. Lagarde has seconded his call for governments that can afford it to spend more and focus less on reducing deficits.
Germany’s government may have taken a step toward easing divisions on the governing council for Lagarde by nominating a more stimulus-friendly economist to replace Sabine Lautenschlaeger, the stimulus opponent who resigned. Isabel Schnabel, a professor at the University of Bonn and a member of a council of experts who advise the government, is being put forward as Lautenschlaeger’s replacement.
Although there is no requirement that eurozone leaders endorse the nomination, Germany as the eurozone’s largest member customarily lays claim to one seat on the six-member executive board that runs the bank day to day from its headquarters in Frankfurt.
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