by Ferdinando Giugliano*
Mario Draghi will give his last speech as president of the European Central Bank today, at a farewell celebration in Frankfurt. The audience will include many political leaders such as Germany’s Angela Merkel and France’s Emmanuel Macron. Both have have already expressed their admiration and support for the man who is widely credited with rescuing the euro zone.
While admiration is always appreciated, the best way to pay tribute to the departing ECB chief would be for Europe’s politicians to reflect carefully on the speeches he has given over the past two years on the future of the monetary union. Although Draghi will be remembered mainly for his statement in July 2012 that the ECB was ready to do “whatever it takes” to preserve the euro, future historians could well find that his real legacy lies in the roadmap these speeches have offered on how to shore up a still-fragile single currency — and the dream of a closer and stronger union.
In May 2018, speaking in the grand setting of Palazzo Vecchio in Florence, Draghi reflected on how far the euro zone had come since the crisis, but argued that there was still more work to be done. “The euro area looks set to exit more resilient than it entered it,” he said. Leaders had already addressed some of the institutional failures that had exacerbated the sovereign debt crisis. These reforms included setting up the European Stability Mechanism, which would lend money to countries in crisis, and moving banking supervisions to the ECB.
But to Draghi, the architecture of the single currency remained incomplete. “To make our Monetary Union more robust against future challenges, we need to address these fragilities.” In particular, he advocated the creation of a single deposit guarantee, which would ensure that all depositors feel equally safe in the monetary union. Second, he advocated a “capital markets union”, which would lead to greater cross-border ownership of European companies. This would ensure that when an economic shock hits one country, the pain spreads more broadly across Europe.
And third, and most controversially, Draghi also made the case for a single euro zone budget. “We need an additional fiscal instrument to maintain convergence during large shocks, without having to over-burden monetary policy,” Draghi said. “Its aim would be to provide an extra layer of stabilization, thereby reinforcing confidence in national policies.”
Many economists before Draghi had said that the lack of a centralized budget was one of the problems affecting the European monetary union. Draghi himself had hinted at this missing piece in a speech in Jackson Hole, Wyoming in 2014. However, this proposition is anathema to countries with healthier public finances, such as Germany. It was therefore noticeable that the typically cautious and politically savvy Draghi decided to add his voice to these calls. This would become a recurring theme in his public interventions.
The exact design of this fiscal instrument is a complex question that politicians and economists have been grappling with for years. Draghi offered some additional elements a few months later, in a September 2018 speech he gave at the Hertie School of Governance in Berlin. “Any proposal,” he said, “should fulfill the following two conditions. First, it should be adequate, so that it can restore full fiscal stabilization capacity. And second, it should be properly designed so as to contain moral hazard.”
This way, Draghi sought to address concerns coming from two different sides. Some, especially in Southern Europe, fear that any single budget would be so small as to be irrelevant. Others, for example in Germany, fear that Berlin would just be insuring or, even worse, subsidizing the more profligate member states. Draghi suggested compromise: “Rather than criticizing our opponents’ views, or offering simple solutions to complex questions that are invariably wrong, let’s try to understand what these lessons are.”
Draghi expanded on this theme in a December 2018 speech in Pisa, celebrating the twentieth anniversary of the creation of the euro. The central question facing the single budget idea was to understand why not all countries in the monetary union had benefitted from its creation. “Monetary Union has succeeded in many ways, but it has not delivered the gains that were expected in all countries,” he said. His explanation, which he applied in particular to his native Italy, was a combination of domestic and communal factors. “The fact that Italy — and other countries — diverged further from the euro area average during the crisis highlights two important points. First, that structurally weaker countries are more vulnerable to economic slowdowns than others; and second, that our Monetary Union remains incomplete in some key respects.”
The completion of the single currency, he again emphasized, would require the creation of some additional risk-sharing mechanisms in the private and public sectors. Draghi sees the two as complements, but also substitutes. “The more progress we make in completing the banking union and capital markets union, the less urgent — although still necessary — it becomes to construct a fiscal capacity, which could at times serve to complement national stabilizers,” he argued. In other words, the more a shock is spread via the capital markets, the less the need for fiscal transfers among member states.
But the issue of completing the monetary union cannot be looked at solely through the lens of economics. It requires a legal framework as well as political conviction. After all, many of the suggested changes Draghi has mentioned in his speeches have been on the table for some time, yet they have proven elusive.
One seemingly insurmountable obstacle is the idea of sovereignty. Political leaders, and their electorates, do not want to give more powers to centralized structures, since they fear this would mean losing control. In a speech this year at the University of Bologna, Draghi addressed this worry, saying one should not make the mistake of conflating independence with sovereignty. “True sovereignty is reflected not in the power of making laws — as a legal definition would have it — but in the ability to control outcomes and respond to the fundamental needs of the people,” he said. “The ability to make independent decisions does not guarantee countries such control. In other words, independence does not guarantee sovereignty.”
Draghi offered the example of countries which are completely shut off from the global economy. These are independent but not sovereign in any meaningful sense, because they often rely on external food aid to feed their people. But he also offered the positive example of the EU: “Cooperation within Europe helps protect states from external pressures, and it helps enable their policy choices.” At a time of rising nationalism across Europe, this was a very powerful message.
Understanding the economic and political rationale behind greater integration is, however, meaningless, if politicians are unwilling to act. This is why Draghi spent the last long lecture of his presidency, at the Catholic University of Milan earlier this month, pondering the three skills a policymaker should have: knowledge, humility and courage. “There will be setbacks and mistakes, because the world is complex,” he told students. “But I hope that you may find encouragement in the fact that, throughout history, decisions based on knowledge, courage and humility have always proven their value.”
Courage is probably the characteristic which most distinguished Draghi from many of his contemporary leaders. He was not afraid to lead, even when it meant facing opposition from some quarters — above all, Germany’s monetary establishment. In his lecture in Milan, he drew from the example of the famous “whatever it takes” speech in London in 2012, saying, “What gave us the courage to act was the conviction that there was a far greater risk if we did nothing.”
“Inaction would have meant nothing less than the failure of our mandate and, potentially, of the currency we had been tasked with preserving,” he continued, pointing to a broader lesson. “Inaction is also a decision. When the effect of inaction would be to compromise the mandate conferred on the policymaker by the legislator, the decision not to act is a decision to fail.”
The euro zone survived a major sovereign debt crisis at the start of this decade because it had the will to push through some fundamental changes to its architecture, especially at the central bank. The fear today is that this process of reform has stopped and that it will take another crisis for the next steps to be taken. That would be risky and, in any case, inflict unnecessary pain upon Europe’s citizens.
As European leaders come to salute Draghi today, they should reflect on his legacy of economic and political teachings — but, above all, on his courage. The next big choices facing the euro zone are for political leaders to make.
*Bloomberg Opinion Editor
**first published in: www.bloomberg.com