The president of the European Central Bank may be the most powerful official in the euro zone. Even as the bloc remains deeply fragmented along national lines, the head of the central bank is able to project sweeping, decisive influence across the continental economy. The bank and its chief show what is possible when Europe is actually unified.
Mario Draghi, the current head of that institution, is overseeing his last monetary policy meeting today, before former IMF director Christine Lagarde becomes president. European economic strategists say the 72-year-old Italian, credited with preventing the euro zone from breaking up, will be missed. In July 2012, less than a year into his tenure, the MIT graduate and former Goldman Sachs banker snapped the deadly feedback loop between European banks and rapidly souring sovereign debt with two sentences: “The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
The central bank followed through by buying billions of euros worth of assets, and in the process stabilized markets and economies, including those on the “periphery” that were in free fall.
“One underestimates the positive impact of much lower yields in the periphery on the economy,” said Sebastien Galy, senior market strategist at Nordea Asset Management. The 19-member euro zone has added more than 10 million jobs during his tenure.
Draghi wasn’t alone, of course. Since taking over in November 2011, he has had the benefit of group of analysts and decision makers—what Galy calls “specialists in the nuts and bolts of monetary policy”—that his successor will inherit. That’s a good thing, because the work isn’t finished.
Perhaps Draghi and the rest of the world’s major central bankers did their jobs too well. Europe is saddled with trillions of euros worth of bonds that yield less than zero. There are worries that negative interest rates are becoming a permanent fixture of the region’s economy, making it difficult for retirees and pension funds to secure an income stream from their investments without taking excessive risk. Negative yields are also sucking profits out of the banking sector, potentially destabilizing Europe’s financial institutions and putting them at a disadvantage versus more profitable American rivals.
Draghi, Lagarde, and other monetary officials can’t fix the EU’s incomplete banking and fiscal union. And they can’t make wealthier governments, like Germany’s, spend more money, which many think is the missing element from the long-running but historically weak recovery.
The ECB has merely given officials a multi-year window to fix the bloc’s deeper problems. It’s still doing what it can—the European economy is sputtering, which has prompted the ECB to restart its bond-buying program. Market signals suggest that investors expect Draghi’s successor to continue with similar policies.
But doubts have long been brewing about how much more the central bank can do. When Draghi retires at the end of this month, Lagarde’s task will be to keep the window open long enough for the leaders of other European institutions to do their part. Will they step up?