It wasn’t perfect, but it was the best we had

No doubt the main thing that Mario Draghi will be remembered for is his famous “whatever it takes”. He told financial markets that the Eurozone was not about to collapse and made it clear that the ECB would save the banks and peripheral sovereign nations of Europe.

More interestingly, however, is to think about how Draghi found himself in the position to be able to QE and to undertake other exceptional monetary policy actions in the face of quite severe opposition, especially from countries like Germany.

When we look at the Eurozone crisis we must remember that by then the euro currency itself was just over 10 years old. The first two ECB presidents, Wim Duisenberg and Jean-Claude Trichet, with their Northern European mindsets, had established the Eurozone currency area’s credibility. In the case of Trichet, this inflation hawkishness had led to the ECB making the biggest policy mistake of its young history, in hiking rates in the midst of the Global Financial Crisis.

So when Draghi, with his Southern European mindset took over, the eurozone was already established as a credible currency area. And more importantly, it had already experienced hawkish policy errors. If the eurozone crisis had happened shortly after 1999, I expect that the currency block would have disintegrated. So Trichet’s failures allowed Draghi to experiment. And in the absence of fiscal policy coordination, and with markets punishing profligate borrowers, it was entirely left to monetary policy to do the economic heavy lifting.

So the ECB and Draghi did save the eurozone, but at what cost? Well, we now have too many “zombie” banks and companies in Europe, used to cheap money, and this will depress future growth. And we also know that QE has diminishing returns as central banks do more of it, so the incoming Christine Lagarde will find that more bond buying will have less bang for the buck.

But history will be kind to Mario Draghi – in a world where politicians refused to save the eurozone through fiscal redistribution, he did “whatever it took”. It wasn’t perfect, but it was the best we had.