Eight years after he took over from Jean-Claude Trichet, today Mario Draghi held his last Governing Council meeting before Christine Lagarde takes over on 1 November. Draghi leaves Europe in a recession, the ECB without ammo, a wealth divide unlike any seen since the Great Depression, and his successor facing an unprecedented revolt across the ECB's governing counsel.
In short, his legacy is nothing short of catastrophic, although his advocates will quickly chime in: he managed to kick the can for 8 years. Well, he sure did, and in the process made the accumulated imbalances, and the coming crisis, that much worse.
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During his 8 years in charge, the Euro Area eventually emerged from a period of sovereign debt crises and saw unemployment drop to 7.4%, its lowest since May 2008. However, inflation proved too stubborn to return to target (averaging 1.19% over the period), standing at just +0.8% in September, while five-year forward five-year inflation swaps standing at 1.202%, just shy of all time lows...
... so, as DB's Jim Reid notes, "not exactly a vote of confidence from the markets that they expect the ECB to get inflation back up again anytime soon."
Another remarkable achievement, or lack thereof, is that unlike Yellen or Powell, Draghi was never able to raise rates during his term, instead pumping ever-more liquidity into the financial system as he fought one crisis after another, while making the rich richer, resulting in Europe's biggest wealth divide in history.
According to Bloomberg, Draghi will be remembered for his pledge to do “whatever it takes” to save the euro during the regional debt meltdown in 2012. Perhaps, but while Europe's sovereign debt crisis is virtually assured to return, one thing that will never "normalize" is the ECB's balance sheet, which in our view, is Draghi's true lasting legacy. Under the Italian central banker, the ECB expanded moral hazard to an art form, setting a price guarantee not only for government bonds but also backstopping corporate debt. The result: the ECB balance sheet has hit level that can never be unwound without triggering a new crisis.
Seen in this light, in addition to "whatever it takes", a more appropriate summary of Draghi's time at the helm of the ECB is a flashback to French King Louis XV: "after us, the flood."
There is one more way in which Draghi's reign will be remembered for its aristocratic roots: while the central bank failed to "inflate" wages and improve economic conditions for most Europeans, the Draghi-era did succeed in pushing the Stoxx 600 back to its all time high.
And it only cost the ECB's €4.7 trillion in asset purchases. Of course, Draghi will disagree, as he will be quick to take credit for the creation of 11 million European jobs since 2013. Many European will beg to differ with this cheerful assessment.
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And while Draghi’s term has another week to go until the former Goldman managing director walks out the doors of the ECB's Frankfurt HQ for one final time before heading to his retirement pastures somewhere in the vicinity of Lake Como, here is how global assets performed under his 8 year tenure, courtesy of Deutssche Bank:
- For a start the euro has weakened by -18.8% against the dollar since November 1st 2011 which likely reflects the relative shifts in monetary policy and growth over the period.
- The Stoxx 600 (c.121% local, 79% dollar adjusted) has lagged the top global performers namely the NASDAQ (+244%), Nikkei (198%) and S&P 500 (191%). Interestingly the best performing Euro-area sovereign is actually the BTP market (+77%) helped by the “whatever it takes” mantra and endless QE.
- Even though Bunds have seen yields collapse deep into negative territory, 10 years were already as low as 1.77% at the start of his reign so the 26% return (2% in dollar terms) is not actually that spectacular and is only slightly higher than Treasuries (19%).
To be sure, Draghi succeeded in stabilizing Europe's economy and capital markets but at a huge cost: after one aborted attempt to normalize monetary policy, Draghi's final act was to not only cut rates to a record low, negative 0.5%, but to usher in QEternity, monetization of debt which as the ECB today said, will "run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates." Which, as we said earlier today, will likely never happen.
It is also largely the consequence of Draghi's policy that the world is now caught deep in the "negative-lower bound" trap, from which as Japan has shown for the past 30 years, there is no escape. It has resulted in as much as $17 trillion in negative yielding debt, a number which has recently dipped to just over $13 trillion.
Looking back, a balanced eulogy for the Draghi term comes from SocGen's Kit Juckes who writes today that "Mario Draghi certainly did it ‘his way'."
He arrived to recession and ballooning peripheral spreads. He delivered a de facto guarantee to the Eurozone bond markets that dismayed some of his colleagues but which has removed one major structural failing of the single currency system. He revived growth without reviving inflation much, delivering an average of 1.2% real GDP growth and 1.2% CPI inflation over the course of his term. Saving the bond market sent the currency on a tear, which helped drag inflation down, and persuaded him to embark on monetary policies which caused even more friction.
Just like his predecessor, Jean-Claude Trichet, however, Draghi biggest mistake was to prematurely declare victory in 2017 and promise to taper bond purchases. The currency soared, Juckes notes, growth slowed, inflation turned back down, with both Germany and the broader Eurozone now in another manufacturing, and soon, wholesale recession.
Worse, with Europe set to enter a recession, the ECB is now out of tools: the deposit rate is at a record-low minus 0.5%, with a pledge to cut again if needed (although that's unlikely as Europe's reversal rate will likely be hit shortly), and won’t rise until inflation “robustly” converges with the goal. QE will start next month with asset purchases of 20 billion euros ($22 billion) a month, and won’t end until "shortly" before the first rate hike; a hike which if the Draghi regime is any indication, will never come.
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Draghi leaves with the job of reviving Europe's economy unfinished, and as he hands over the monetary baton to former IMF-head Christine Lagarde "she might as well use it to beat up finance ministers and campaign for Europe's fiscal "rules" to be thrown into the Rhine", as Juckes writes.
In keeping with this scorched earth policies, Draghi leaves the ECB a dictatorship, with any democratic agreement over how to conduct monetary policy in tatters, after his decision to cut rates and resume NIRP left Europe hopelessly split with the biggest central banks revolting against Draghi's monetary policies while Europe's economically-challenged periphery wholeheartedly praising it.
Finally, in typical style, Mario Draghi took credit for all his successes while blaming Europe's governments for not launching more fiscal easing -i.e., issuing more debt - to help his task. Because in Draghi's world only more debt can fix a crisis that was caused by record debt in the first place. Ironically, it was Draghi's eagerness to step in with ever more monetary easing at a moment's notice that removed any urgency from Europe's politicians to act, leaving the ECB trapped and forced to ease ever more any time a crisis seemed inevitable.
To be fair, though, it's not just Draghi - that's the logic of every policymaker, and as the realization that the end of the road of this debt-funded can kicking exercise approaches, it is not surprising to see that increasingly more legacy apparatchiks are quietly quitting, knowing full well what comes next.
One person who is not resigning is Christine Lagarde, whose term as head of the ECB starts on Nov. 1. There, she is sure to bring her extensive experience of "fixing" problems, demonstrated most vividly by the destruction the IMF left in its wake in Argentina, which less than a year after the IMF's largest ever bailout, is bankrupt again.
And so, as Europe's era of kicking the can comes to an end, and a very painful mean-reversion looms, the establishment has conveniently put women at the helm of the world's two most important institutions: the IMF and the ECB, just so when the rightful anger at the devastated state of the European - and global - economy finally boils over in the very near future, it can simply by ascribed to sexism.
Meanwhile, the man behind it all - the man who as we said above, leaves Europe in a recession, the ECB with no more ammo, a wealth divide unlike any seen since the Great Depression, and his successor facing an unprecedented revolt across the ECB's governing counsel - will be enjoying his retirement far, far away.