Mario Draghi’s impressive start as head of the European Central Bank has not been repeated as he fails to act on eurozone crisis
Mario Draghi got off to a good start as president of the European Central Bank. Faced with a rapidly deteriorating situation in the eurozone, the Italian acted speedily late last autumn to head off what was threatening to be a serious credit crunch for Europe’s banks.
That was then. There was little sign of the all-action Super Mario at the press conference that followed the meeting of the ECB’s governing council in Barcelona. Instead, this was the ECB of old: cautious, conservative and complacent.
Reports suggested that Draghi ruled out a further easing of monetary policy, but this was not strictly true. The ECB may cut its key lending rate from its current level of 1% but it will require fresh evidence of the weakness of the eurozone economy before it does so.
But just how much bad news does the ECB need? Unemployment in the eurozone is already nudging 11%, the highest level since the single currency was created. In Spain, youth unemployment is now above 50%. This week’s surveys of purchasing managers have been dire. Pressure has been mounting in the Italian and Spanish bond markets.
If that’s not enough, then there are plenty of economists – although perhaps not the ones employed by the ECB in Frankfurt – who are convinced that things are going to get a lot worse.
The recession already gripping the crisis-stricken countries of southern Europe will spread northwards into the core economies, including Germany, putting pressure on a shaky financial system. The ECB risks squandering the time it bought with its three-year, long-term refinancing operations (LTRO), the offer of cheap money to help banks through their acute cash-flow problems.
On past form, the ECB will respond – eventually. It will probably provide additional LTROs and is likely to cut interest rates once the crisis gets bad enough. But a good central bank is proactive and pre-emptive; it should anticipate events rather than react to them. And the current threat is not the chimera of higher inflation but a long, arctic winter of the eurozone.