As Mario Draghi steps down from his European Central Bank role, it is crucial that other parties take responsibility for the EU’s fiscal direction.
Mario Draghi’s tenure as president of the European Central Bank (ECB) has concluded in a stormy fashion. His parting policy initiative – the introduction of a sweeping monetary stimulus package – has drawn the ire of ECB critics old and new. It has also heightened the ideological tensions within the institution itself.
Public interventions from dissenting voices on the bank’s governing council have, extraordinarily, become the norm in recent weeks. The current spat over the central bank’s unconventional measures follows a number of years in which the ECB has employed loose monetary policy and quantitative easing to support the eurozone economy and pursue its inflation target.
This approach has produced mixed outcomes. For one, it has massively distorted asset prices. More than half of all of Europe’s outstanding government bonds have a negative yield, while a number of eurozone economies have experienced strong growth in house prices since 2014, leading to fears of emerging bubbles.
These examples, and others, are not the byproduct of a healthy policy environment. Indeed, they reflect an economy that is suffering from serious design flaws and political inertia. The ECB’s role in supporting the euro area since the global financial crisis has clearly been unorthodox – but it has been the only institution capable of decisive action.
This situation cannot continue. First, national governments with the necessary fiscal space must step in to offer targeted stimulus. Doing so would alleviate the pressure on the ECB and offer the economy an additional boost at a time when downside risks are dominating the euro area’s horizon.
Beyond this, the shortcomings of the eurozone’s architecture must be addressed. This will require political will and, in many instances, the execution of difficult and unpopular decisions. In particular, the march towards fiscal union must continue. Recent Franco-German budgetary instrument proposals are a step in the right direction.
Yet time is not on the euro area’s side. Warning lights are flashing for the global economy, and the next crisis may arrive well before any meaningful political change occurs. With the limits of the ECB’s monetary policy now being tested, the time has come for leadership from other quarters.
