Draghi legacy: a sturdy European Central Bank

With Mario Draghi set to retire as president of European Central Bank on Oct 30, people are wondering whether his legacy would influence his successor, and whether the ECB and the eurozone would continue to perform well.
Eight years ago, the eurozone's financial credit and liquidity market shrank dramatically as a result of the 2008 global financial crisis. To rescue the market, the ECB adopted a wide variety of nonstandard measures, such as the euro-denominated covered bonds purchase program, securities market program and longer-term refinancing operations－which are liquidity with low interest rates.

But since the eurozone lacks the lender of last resort mechanism due to its special political structure, the lingering panic in the market caused the liquidity crisis to worsen. Consequently, the eurozone was on the verge of collapsing owing to the continuous accumulation of systemic risks.

Under such a critical situation, Draghi, as the newly elected president of the ECB at that time, focused on stability, and made price stability as the primary objective of the ECB's monetary policy. He realized that monetary policy based on interest rate could not meet the monetary policy requirements of the ECB, because the severely distorted government bond market had destroyed the simplicity and conduction mechanism of monetary policy, which prevented the monetary policy's objectives from being fulfilled.

Therefore, with the aim of rationalizing the conduction mechanism of monetary policy, Draghi announced the ECB would launch a bond-buying campaign called "Outright Monetary Transactions" on Sept 6, 2012. Without exceeding its power, the ECB, along with the European Stability Mechanism, played a vital role as the final lender in a creative way in order to stabilize the eurozone financial market.

Draghi was also aware of the fact that the macroeconomic structures and monetary conditions of different EU member states were very different and, therefore, a unified interest rate policy alone could not remove the discrepancy of the conduction mechanism of monetary policy.

In many EU member states that faced risks, liquidity with low interest rate didn't get into the real economy, but was recycled within the banking system, which aggravated the economic downturn. As a result, the inflation rate gradually declined in those countries and eventually affected the price level in the entire eurozone.

So, on Jan 22, 2015, Draghi put forward the expanded asset purchase program. This quantitative easing plan aimed to not only release liquidity to stimulate economic growth, but also re-grant EU member states a certain amount of liberty in terms of monetary policy so they could cope with the problems created by the malfunctioning of the ECB's previous monetary policy.

From the word go, Draghi focused attention on the conduction mechanism of monetary policy based on the eurozone's special institutional framework, and attempted to constantly innovate the monetary policy. His programs have helped to stabilize the financial and monetary situation in the eurozone.

After the implementation of the Single Supervisory Mechanism, the ECB's authority has expanded and the bank has become the core part of the banking supervision system in the eurozone. As such, the ECB has developed more diversified monetary policy tools, and begun to play an important role in the institutional construction of EU economic governance.

The eurozone economy has been recovering more or less steadily since 2013. In fact, all EU member states' economies registered positive growth in 2017－the first time since the 2008 global financial crisis－and their unemployment rates declined. The past several years have also seen the EU extend and strengthen the optimal currency area and consolidate the structural factors to support middle-and long-term development.

These fundamental changes in the eurozone's basic economic dimensions prompted the ECB to withdraw the quantitative easing policy at the end of last year. And since the EU's current monetary policy is expected to function effectively, Draghi's successor may not need to come up with innovative policies, at least for the time being.

The author is a researcher at the Institute of European Studies, Chinese Academy of Social Sciences. The views don't necessarily represent those of China Daily.