Europe is finally showing inklings of recovery after a painful six years. Data on manufacturing and services suggest that the euro area may report positive GDP growth next quarter. Banks, meanwhile, are slightly more open to lending to small businesses, which are seeing slightly lower interest rates on their loans. And after two years of rising, the aggregate euro zone unemployment rate finally fell in May.
Although European Central Bank (ECB) president Mario Draghi deserves much of the credit for these signs of progress, today he rebuffed praise.
“If you think all these improvements were only due to [Outright Monetary Transactions], then thank you very much but I’m sorry,” he said at a press conference, referencing a back-stop program for European countries.
Why would the man known as “Super Mario” be reluctant to take credit for righting a flailing economy?
Probably because, as Draghi knows, the tools at his disposal can only address the symptoms of the crisis, not the structural problems dragging on the economy.
Draghi’s moves have been risky and controversial. The ECB has taken unprecedented action during Europe’s sovereign debt crisis, particularly for a central bank that has always prized price stability (low and steady inflation) above all else. The central bank, making extraordinary use of unconventional monetary policy operations, can be credited for restoring investor confidence on the continent.
Europe’s sovereign debt crisis emerged because investors believed that certain European governments might not be able to make good on their debts. They weren’t earning enough tax revenue to pay interest on the debts and roll them over. So investors dumped certain government bonds (e.g. Greece) and put their money into others (e.g. Germany). This made it even more expensive for troubled countries to raise money from the markets and forced even more investors to flee to safer havens. Ultimately this vicious cycle prompted bailouts. The ECB’s involvement fixed this crisis of confidence.
These bailouts came with tough conditions. European leaders went to Greece, Portugal, and Ireland (and to a lesser extent, Spain and Italy) to demand austerity. Only hard-hearted reforms, they said, would reassure investors and result in economic growth.
Euro zone leaders may have been right about that five, ten or 15 years down the road. But in the short-term, these austerity policies didn’t increase government revenues; They stifled economic growth. Fewer people in Europe’s struggling economies are employed now than were before the bailouts, which has resulted in less tax revenue. Businesses have gone under. Government debt has only worsened.
The only source of calm now—and maybe for the next few years—is Super Mario, whose policies have encouraged banks to continue lending to both governments and to businesses. His promise to “do whatever it takes” to save the euro established a backstop for struggling sovereigns where before there was none. The structural reforms countries have adopted simply don’t work that fast, and may not necessarily turn out to be successful.
In public, Draghi is toeing the line, supporting politicians’ long-term reforms. Even if he feels that the ECB, not austerity, is what’s boosting the economy, he knows it’s wiser to give politicians the credit.