The financial establishment have labelled Mario Draghi’s tenure a disaster for Europe – they might be right

The outgoing European Central Bank president has come under fire for imposing zero interest rates, an ultra-easy money policy that has done more harm than good

Mario Draghi saved the euro but massively damaged the Eurozone economy (Reuters)

When central bankers are in office they are frequently regarded as heroes. After they retire, their reputation slips, sometimes disastrously. And so I predict it will be with Mario Draghi, president of the European Central Bank, after he hands over to Christine Lagarde at the end of this month.

Draghi will be remembered for one phrase: “Whatever it takes.” He said it on 26 July 2012 in a speech in London, when the euro was in danger of breaking up. Bond yields of the weaker countries were soaring, the Eurozone was back in recession, and most market commentators could see no way in which the euro could be saved.

This was the full quote: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

Well, that has been proved right, at least so far, in the narrow sense that it pulled the euro through that crisis. The ECB promised to buy the bonds of the distressed member states and pump money into the Eurozone economy. Since then the ECB has gone on with a broader objective, by trying to push up growth in Europe by various devices, the most extreme of which has been imposing negative interest rates. That has half worked. Eventually, a recovery did get going. But now growth is faltering, particularly in Germany, which the influential IFO institute forecasts will grow by only 0.5 per cent this year. And there is a widespread view in Germany that the ECB’s policies are in part to blame.

In the past few days, Oliver Bäte, the head of Europe’s largest insurance company, Allianz, has attacked Draghi for “politicisation” of monetary policy. And Christian Sewing, chief executive of Germany’s largest bank, Deutsche Bank, has warned that negative rates have ruined Europe’s financial system. Two former chief economists of the ECB, Otmar Issing and Jürgen Stark, who are both German, have also co-signed a letter attacking the ultra-easy money policies of the ECB. The letter was also signed by a string of other former top central bankers from Austria, France and the Netherlands as well as Germany. This is not just a German thing.

In the eyes of a huge swathe of Europe’s financial establishment, Draghi has been declared a disaster before he has even retired. Are they right? I think the answer is yes.

The charge against him, boiled down, is twofold. One is that the method of pumping money into the system – buying sovereign bonds of countries that would otherwise have to pay a higher rate to borrow – has in effect meant that the ECB has financed the deficits of the weaker member states. The other is that this ultra-easy money policy has done more harm than good.

The first is more of a legalistic attack: the ECB has done something it was prohibited to do. There is a sub-text to this that is unsaid: that Draghi is Italian and Italy has the largest government debt in Europe. So he wants to use the ECB as a back-door way of subsidising profligate Italian governments.

Fair? Well, that is certainly a common view across northern Europe, and there may be an element of truth in it. It is hard to prove, and so far the courts have supported the ECB’s policies, but the challenge will continue and Lagarde will struggle to manage the conflicting pressures.

The second line of attack is more practical: cheap money is socially damaging, has created huge risks, and anyway doesn’t work. Here the evidence is mounting – and this applies to the US and UK as well. The socially-damaging is familiar to us. Low interest rates have inflated asset values and so increased wealth inequality. They have encouraged savers to take greater risks to get a decent return on their savings. And they have enabled wealthy savers who can pay for good advice to get a decent return, while condemning poorer ones to no real returns at all.

The risk argument is that low rates and easy terms have allowed borrowers to raise funds that they won’t be able to repay. The debts in most developed countries are now larger than they were in 2007 ahead of the last financial crisis.

As for not working, the nub of the argument is that if returns are very low (or negative), people have to save more and spend less than they otherwise would. They have to put more into a pension plan if the returns of a pension plan are lower. And a damaged banking system is less likely to lend, not more.

All this adds up to a pretty devastating charge sheet. In a way, Draghi has been unlucky. He had an impossible job. He did what it took to save the euro. But what it took has done massive damage to the European economy. He will be remembered for that too.