October 25, 2019
We should listen to what Mario Draghi is saying about the future of the euro
European newspapers are saying their good-byes to Mario Draghi, who gave his farewell press conference as ECB president yesterday. We will focus on his forward-looking reflections on the future of the eurozone, which we think are very important. As he's still ECB president, he is naturally cautious. We hope, and expect, that after an extended post-retirement purdah, he will become more explicit in his public pronouncements. But even what he said yesterday gave us some insights into this thinking.
Since Draghi had pretty much exhausted the policy arsenal at the previous meeting, there wasn't much new yesterday, but he was more interesting on the future of the eurozone. Asked whether he expected governments with fiscal space to heed the ECB's call for timely and effective action, he answers that the effectiveness depends on whether fiscal stimulus will spill over from the countries that can apply it to countries that need it. He believes that national fiscal policy has only limited spillovers across borders. In the long-run, the spill-over effect will depend on progress towards a central fiscal capacity for the eurozone with a genuine capacity to stabilise the economy over the economic cycle. That in turn will require changes to the governance of the institutions that are created to carry out that central fiscal function. At the national level, the German debt brake is an example of an issue of governance that may stand in the way.
This is probably as much as Draghi could say without stepping outside his mandate as ECB president and on everyone else's toes. But the direction of travel is clear. His remarks put him on one end of the policy debate at the top of the eurozone, advocating a large central fiscal capacity with a countercyclical stabilisation function. But he is also clearly mindful of the political and institutional obstacles that need to be overcome.