The Art of Monetary Policy According to Mario Draghi
The art of European monetary policy has changed significantly over the past two years as confirmed with this selection of Mario Draghi's verbatims from two of his most sieved speeches. The first one refers to the London speech on July, 26th, 2012 at the Global Investment Confernce (1). The second one focuses on August, 22nd, 2014 speech at Jackson Hole on unemployment in the Euro Area (2).
"While I was glorifying the merits of the euro, you were thinking “but that’s an average!”, and in fact countries diverge so much within the euro area, that averages are not representative any longer, when the variance is so big. But I would say that over the last six months, this average, well the variances tend to decrease and countries tend to converge much more than they have done in many years" (1)
"When people talk about the fragility of the euro and the increasing fragility of the euro, and perhaps the crisis of the euro, very often non-euro area member states or leaders, underestimate the amount of political capital that is being invested in the euro. Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." (1)
(Responding to high unemployment figures in the Euro Area): "The only conclusion we can safely draw, in my view, is that we need action on both sides of the economy: aggregate demand policies have to be accompanied by national structural policies". (2)
"Demand side policies are not only justified by the significant cyclical component in unemployment. They are also relevant because, given prevailing uncertainty, they help insure against the risk that a weak economy is contributing to hysteresis effects. Indeed, while in normal conditions uncertainty would imply a higher degree of caution for fear of over-shooting, at present the situation is different. The risks of “doing too little” – i.e. that cyclical unemployment becomes structural – outweigh those of “doing too much” – that is, excessive upward wage and price pressures". (2)
"At the same time, such aggregate demand policies will ultimately not be effective without action in parallel on the supply side. Like all advanced economies, we are operating in a set of initial conditions determined by the last financial cycle, which include low inflation, low interest rates and a large debt overhang in the private and public sectors. In such circumstances, due to the zero lower bound constraint, there is a real risk that monetary policy loses some effectiveness in generating aggregate demand. The debt overhang also inevitably reduces fiscal space". (2)
What is particularly interesting to notice is the evolving anchoring of Draghi's prerogatives. While adopting a more independant tone on the adequate use of policy-mix and structural reforms, the ECB governor acknowledges monetary policy as being a supportive tool, not a defensive weapon that could alone shield the Euro Area from shattering (Bloomberg view, september 2014). Entering the political arena might turn both risky and ineffective for Draghi who would be pressured to stick to Credit Easing programs whereas some economists call for a full-blown Quantitative Easing (Brunnermeier and Sakannov, 2014).
