London, July 26, 2012: Mario Draghi will also speak at the Global Investment Conference. He speaks for almost seven minutes, but a full 16 seconds are enough to go down in the history of the European Central Bank's monetary policy: "There is one more message I would like to share with you," said the then President of the Central Bank.
"Within our mandate, the ECB stands ready to do whatever it takes to preserve the euro." Pause. "And believe me, it will be enough."
Whatever is necessary - "Whatever it takes", this is the catchphrase for Draghi's speech today. A strategic and rhetorical masterpiece in itself, which brought market speculation on a breakup of the euro zone to an abrupt end.
That Draghi would have saved the euro with his appearance is of course a story that cannot be held up in retrospect. This is already shown by the unrest around the common currency that has arisen in the context of the turnaround in interest rates.
What the Italian did was shift the systemic problems of a dysfunctional currency union into the future, buying time. Time that the governments of the euro member states should have used to make the European house weatherproof for future crises through structural reforms and sustainable budgetary policies. It passed unused.
The collateral damage caused by monetary policy over the past decade weighs almost even more heavily. This includes an erosion of credibility and trustworthiness in the monetary system and politics as well as a division of society into winners and losers of monetary policy.
Although their actual fall from grace goes back to Draghi's predecessor Jean-Claude Trichet and the year 2010. Even back then, the ECB was taking government bonds on its books, making it easier for countries that had gotten into trouble as a result of the financial crisis and the subsequent banking crisis to finance their budgets, and thus for the first time aroused doubts about their own independence.
But it was the Italian who offensively "put this procedure in the shop window" with his London speech and the subsequent measures. In doing so, he laid the foundation for a monetary policy that, in barely concealed solidarity with governments, increasingly at least extended its mandate, thus conflicting with European treaties and rules and ultimately transforming the euro zone into a transfer and liability union.
According to the share of ECB capital, Germany's taxpayers bear the greatest risk. In 2020, they were allowed to watch Draghi being awarded the Federal Cross of Merit.
The purchase programs for government bonds that the ECB launched over the years flooded the markets with liquidity and inflated the central bank’s balance sheet to almost nine trillion euros – in 2015 the balance sheet total was two trillion.
The fatal consequences of this ongoing euro bailout policy, which enabled the heavily indebted southern states to finance their budget deficits, could be concealed for a long time. The newly created money first made its way into the real estate and stock markets, where it led to asset price inflation, while savers and life insurance policy holders suffered from the artificially depressed interest rates.
In the meantime, the consequences of the uncontrolled increase in money are also affecting consumer prices: the ECB’s tale that the pandemic, disrupted supply chains and the Ukraine war have caused a supply shock that has primarily made energy more expensive, which is affecting all products and services equally, is not not correct.
But it is only half the truth. Because parallel to the dwindling supply of goods, the ECB has boosted demand by massively flooding the markets with liquidity. It ended up as corona aid for citizens and companies, who put the money into investments and consumption and thus drove up prices due to an explosive increase in demand after the lockdowns.
In the fight against inflation, which would be the real mandate of the ECB, the central bank's hands are now tied after years of being co-opted by the interests of the southern countries. Because their debt has now grown so much that the announcement of a mini increase in the key interest rate triggered nervousness on the markets and caused the yield premiums on Italian government bonds to rise significantly compared to the more solid federal bonds.
The negligent, hesitant action of the central bank does not encourage people to believe that the central bank really wants to fight inflation. What other realistic solution would there be in the medium term to reduce the horrendous mountains of debt in the euro zone?
In the short term, under the current pressure from the markets, which Draghi himself is increasing with his resignation as Italian Prime Minister, the ECB can only flee forward. And so the intervention spiral of the last few years is being pushed forward with a so-called "anti-fragmentation instrument" (TPI), through which papers from the southern debt countries can be bought preferentially.
This should primarily enable Italy to continue to take out loans that are as cheap as Germany. The ECB would thus take securities into its books that no one would want to have on the free market at these conditions.
This has little to do with the tasks of an independent central bank. It is thus increasingly becoming an authority that decides whether and how individual states can finance their debts. Consequently, it potentially makes itself the judge of the fate of governments.
Just in time for the tenth anniversary comes a kind of new "Whatever it takes". But while Draghi's plan at least provided for bond purchases to be made only after a country's request for help and against conditions for reform, the first assessments of the TPI read as if the ECB would no longer feel bound by the judgment of other institutions and would decide at its own discretion when to intervene in the market and when not.
"Whatever it takes" becomes, as the chief economist at ING put it, "whatever we want". One does not want to know what will be written on July 26, 2032 about the monetary policy of the previous ten years.
"Everything on shares" is the daily stock exchange shot from the WELT business editorial team. Every morning from 7 a.m. with the financial journalists from WELT. For stock market experts and beginners. Subscribe to the podcast on Spotify, Apple Podcast, Amazon Music and Deezer. Or directly via RSS feed.
