Draghi’s complicated legacy
This week, Mario Draghi passed the presidency of the ECB onto Christine Lagarde. At a time when the spotlight is firmly fixed on Europe for so many reasons, it seems an opportune time to reflect upon Draghi’s 8-year tenure, a period that’s seen the world go through near-unprecedented levels of change.
Draghi will be best remembered for how he kept the eurozone intact with his infamous 2012 speech, stating how the ECB would do “whatever it takes” to prevent a breakup. Central bankers are rarely that explicit in their public support for a common institution. Draghi’s words, whilst surprising at the time, threw Europe a lifeline that they continue to cling to today.
Thinking about Draghi’s speech brought back some memories of trading through the European sovereign crisis. It felt like we were glued to the TV every day, watching Draghi deliver press conferences and announcements, seeking to calm and bolster markets. Perhaps more so than any figurehead from the last decade, Draghi’s influence was felt by markets in real-time, on a minute-by-minute basis. Central bankers can nudge markets. But Draghi’s words could tilt them.
As we now know, more than any other central banker, Draghi supported accommodative policy, using every weapon at his disposal to keep the eurozone afloat. And he didn’t just toy with short term rates. He also unleashed multiple bouts of QE, buying government debt and corporate bonds via the Corporate Sector Purchase Program. He truly did do whatever it took. If his achievements are to be measured by Europe’s survival, he succeeded. But at what cost?
In recent months, as Draghi began to hand the baton over to Lagarde, you could see how he had become frustrated by the limitations of the ECB’s toolkit. As Europe continues to grapple with persistently low inflation and slowing growth, Draghi has become much more vocal in his calls for fiscal policy to support and bolster that growth across the continent.
In this regard, Draghi and Lagarde have a harder job when compared to, say, the US. There is no pan-European fiscal policy and the bloc’s largest economy, Germany, has traditionally had a culture of fiscal conservatism. Concerningly, it now seems that low interest rates are having less of an impact, and could be, in fact, exacerbating income inequality and social unrest.
Of course, low rates affect multiple sectors, such as the private markets and tech, in a myriad of ways. It can also lead to abhorrent situations where a failed founder gets paid $1.7bn to go away. But outside the venture/PE world, negative rates are inflating values in all assets, including real estate, and this is deepening societal divisions and leading to populist uprisings at both ends of the political spectrum. If rates stay low, it’s hard to see how that gap can narrow.
As Draghi stands aside, unpacking his legacy is tricky, as we don’t yet know where what he started will end. I’m no fortune teller, but I don’t think we’re approaching a significant breakdown in markets, at least not one that will demand a reset for the policies that began nearly a decade ago. That’s primarily because central bankers have nowhere to go, other than continuing to do what they’ve been doing to keep their respective markets afloat.
Private market valuations will come down a touch, and we’ll likely see further high profile write-downs and exposures in the coming months (which, when justified, is a good thing), but public markets are hardly overvalued. Markets will likely rumble on, as rock bottom rates continue to provide a growth environment, however unsustainable in the long term that may be.
Unfortunately, where we may see a reset is in the political sphere, and this could be peaceful or otherwise. Whether this manifests itself in the ongoing rise of strongman, populist politicians, or the advance of neo-socialism, or both, the rising anger towards ‘the elite’ will continue to foment as long as rates stay this way. When that anger reaches boiling point – and the temperature has increased from Hong Kong to Lebanon, Chile to Haiti in recent weeks – is impossible to predict.
Hence, Draghi’s legacy is a complicated one. Despite the eurozone’s survival, he leaves Europe and the world in a state of perilous flux. That state is thanks, in no small part, to the decisions he took as Europe’s central banker. We have to hope that Lagarde can find a new way to spur the growth Europe desperately needs in a way that doesn’t add fuel to the burning fire of societal disquiet. If she can’t, it might look like Draghi’s “whatever it takes” was, in fact, a step too far.