On November 1, 2019, the “Central Guard” will take place at the European Central Bank (ECB): Christina Lagarde, former Executive Director of the International Monetary Fund, takes over as the chairman (president) of the ECB, and Mario Draghi leaves this post. Mario Draghi led the European Central Bank for eight years. He was the third chairman of the ECB, the previous ones were Dutchman Wim Duisenberg (1998−2003) and Frenchman Jean-Claude Trichet (2003−2011).
Mario Draghi faced a difficult task to restore the European economy after the financial crisis of 2007-2009. and prevent the collapse of the monetary union of Europe (the eurozone). To solve this problem, he went on a dangerous experiment to liberalize the ECB’s monetary policy (such an ultra-liberal policy is commonly called the “pigeon”).
Firstly, the ECB key rate has been drastically reduced. When Mario Draghi joined the ECB, she was already low – 1.5%. During the first year, he lowered it by half. And on March 10, 2016, the key rate was lowered to zero. And since then remains at this level. At the same time, the interest rate on ECB deposits is lowered below zero – to minus 0.4%.
Secondly, a program of so-called “quantitative easing” – QS (Quantitative Easing – QE) has been launched. It started in March 2015 and consisted in the purchase by the European Central Bank of bonds (treasury bonds) issued by member states of the eurozone.
The COP program was valid until December 31, 2018. During this time, the ECB bought up securities worth 2.6 trillion. euro, nearly doubling its assets. In terms of assets, the ECB is one of the three largest central banks in the world: in addition to it, it is the Bank of Japan and the People’s Bank of China. All of these banks had assets of about 5 trillion at the end of 2018. dollars. The federal reserve, with an asset ratio of approximately $ 3.7 billion, was only in fourth place. The ECB’s COP program actually meant turning on the “printing press” at full capacity and flooding the economy with its “products” (money).
Mario Draghi, with its “pigeon” monetary policy, did not manage to revive and restore the European economy. But he eased and accelerated the buildup of debts by the eurozone member states. So, not without the ECB’s “bear service”, Greece’s debt during the time it provided financial assistance (the assistance program was completed in August last year), the country’s sovereign debt not only did not decrease, but grew from 170 in 2016 to 190% of GDP at the end of last year .
The ECB president would probably use even more radical means of “curing” the economy, lowering the key rate below zero and increasing purchases of debt securities. But he had many opponents who rightly called the “treatment” methods used by Draghi called “drugs”. Such methods give the illusion of relief, but the disease is not treated, and the crisis is postponed to a later time. Under the pressure of critics (including the heads of some central banks of countries belonging to the eurozone; representatives of the banking business, conservative politicians, etc.) Draghi was forced to agree to curtail the COP program by the end of last year.
The pace of economic growth in Europe this year began to fade. Since October last year (that is, for the past year) there has been a decline in industrial production in the eurozone. The growth rate of GDP on a monthly basis in the last year varies in the range of 1.1-1.2%. Inflationary price growth in September this year amounted to (on an annual basis) only 0.8%. Again, the real threat of deflation arose.
Mario Draghi constantly had to maneuver and take into account criticism of opponents of the ECB’s ultra-liberal monetary policy. The bulk of these critics are Germans and French. They believe that the main burden of saving a united Europe under such a policy rests with the “locomotives” of the European economy – Germany and France.
In the last months of his stay in the chair of the ECB President, Mario went all-in and made decisions on further liberalizing the ECB’s policies. At the September meeting of the ECB’s board of directors, he “pushed” a decrease in the interest rate on deposit operations from 0.4 to 0.5%. Also in September, Mario Draghi announced the resumption of the COP program.
It is very significant that Draghi timed the start of a new round of CS exactly by November 1, when Christina Lagarde.
It is very significant that Draghi timed the start of the new round of the Constitutional Court exactly by November 1, when Kristina Lagarde takes the chair of the ECB leader. It is also noteworthy that the end date for the new COP program has not been determined. It was said that it would be curtailed only when interest rates began to rise in the financial markets.
I note that today in the global context there is a tendency to lower interest rates, with approximately a third of all securities traded on the markets already have negative interest rates. But the ECB, which has already kept the key rate at zero since March 2016, helps to lower interest rates in financial markets (in fairness, it should be recognized that other central banks, especially the Bank of Japan, the National Bank of Switzerland, the Central Bank of Sweden and Denmark, whose key rates have long been in the negative zone, and are not going to return from there).
Mario Draghi determined that the purchase of securities under the new COP program will be 20 billion euros per month. The bold steps Mario Draghi made on the eve of his resignation really excited the American president Donald Trump, who called on the US Federal Reserve to more boldly follow the ECB’s example (the other day Trump demanded that the Fed lower its key rate below zero).
We are witnessing unannounced competition between the Fed and the ECB: who has more pigeon politics? Experts call everything by their proper names: this is not competition, but a currency war.
Officially, Trump did not declare a currency war of the New World against the Old World. But this indirectly follows from a number of his statements. In particular, appeals to Fed Chairman Jerome Powell to help lower the dollar exchange rate. With more specific explanations: it is necessary to lower the dollar against the renminbi and the euro. And if so, then neither the Federal Reserve nor the ECB will lower key rates in the foreseeable future. And if so, then the COP program announced by Mario Draghi will continue indefinitely. Until some event occurs that will force the leaders of the monetary authorities of the New and Old World to wake up (global crisis or war).
The baton of “treatment” of the European economy with “drugs” Mario Draghi passes Christine Lagarde. It is difficult to say how this lady will behave after receiving such an “inheritance” from the previous chairman of the ECB. She is unlikely to be able to reverse the decisions of Draghi, and even hardly wants to. After all, she needs to understand this difficult economy. It must be borne in mind that Cristina Lagarde is not a banker (from her experience she is a lawyer, she was also a minister of economy and industry in the French government for some time).
She does not have the experience and leadership of the Central Bank. Especially like the European Central Bank. After all, there on the board of directors are represented the heads of the central banks of all eurozone member countries. People are very complicated. Draghi was a very tough leader and was able to achieve the “consensus” he needed.
Whether Christina Lagarde will be able to do the same is a big question. The International Monetary Fund was a little easier for her. There was a “main shareholder” – the United States, which gave commands. And Christina voiced and performed them. If necessary, the “main shareholder” helped her using his special capabilities. There are at least two “main shareholders” in the ECB – Germany and France. And on some issues, Italy has recently been trying to put its “decisive word”, where Eurosceptics have recently come to power.
So, at least during the first year, Christina Lagarde will avoid making any serious decisions. Therefore, it will by inertia conduct the ultra-liberal course that Mario Draghi laid down. Experts believe that due to a lack of knowledge in the field of economics, Christine Lagarde will rely on the help of the ECB chief economist. This is currently Philip Lane, the former head of the central bank of Ireland.
Experts draw attention to the fact that under the current rules, the ECB will not be able to implement the new COP program for too long. The fact is that the ECB has already bought up a significant part of those securities, which he could buy according to the rules. The rules state that the ECB may acquire up to 1/3 of the total treasury securities issued by a member state of the eurozone. In the COP program approved by Mario Draghi, monthly purchases of German securities are set at EUR 3.7 billion. With such volumes of purchases, the quota of German securities will be exhausted in 11 months. For purchases of Dutch securities (0.8 billion euros per month), the quota will be exhausted in 6 months.
The longest purchases are estimated on Italian securities (2.4 billion euros per month) – 103 months. But in general, a norm that sets a procurement limit of 1/3 of the total volume of securities of a member state of the eurozone can become a serious brake in a year in the implementation of the new COP program. Mario Draghi sought to increase the procurement rate to ½. However, I did not have time to do this.
Mario Draghi also sought to expand the range of securities that the ECB can buy. In addition to treasury bonds, he suggested starting large-scale purchases of corporate bonds. He also did not have time to do this. Mario Draghi wanted to lower the key rate below zero. Also failed or did not have time.
Apparently, such problems will have to be solved by Christine Lagarde. Naturally, in the event that she considers it appropriate to continue the “pigeon” policy of Mario Draghi. Most experts believe that it will continue it and may even make it even more “soft”. The “treatment” of Europe with the “drugs” of the ECB will continue. Apparently until the “patient” finally “dies”. Here we mean that in Europe a full-blown economic and financial crisis will soon begin.