Mario Draghi interview: He reflects on the 8 years as ECB President

Mario Draghi steps down as ECB President at end of this month.

In this FT interview, Draghi discusses and reflects his term:

Before you became ECB president, you were in Frankfurt often as governor of the Banca d’Italia. Did it strike you before you joined the ECB that there needed to be the sort of changes that we’ve seen you make.

The extent of the crisis was clear to me. The contagion had spread throughout the euro area periphery, the banking crisis was peaking with bank runs pushing some banks to the brink of failure, dollar liquidity was insufficient. But as soon as I moved here the policy analysis was wider. The scope of possible actions is much larger than at the national level, the initiative to act springs from this.

Within a few weeks of moving here you took your first action when you cut rates. What were those first few months like?

There is a wealth of information that you have access to only from here. Everything pointed to a situation that was spiralling downward.

We had been in a crisis, then we seemed to have done slightly better by the turn of 2010. By the end of 2011, the credit flows to the private sector were dropping dramatically. The economy was already shrinking. There was also evidence of sovereign and bank contagion.

It was a natural response to immediately lower interest rates once and then a second time, and then introduce the LTRO. The LTROs were not completely without precedent, there had been similar longer-term credit lines. The difference was that these were for three years, and the terms and conditions were much easier. The collateral rules were changed too, some of the earlier experience showed that with certain collateral rules these credit lines might not have been accessed.

You didn’t necessarily expect to become the ECB president.

No.

It was a twist of fate. Were you ready for the job?

I don’t know. Up to others to judge.

Did you have a plan?

I had been governor for six years. I was chair of the FSB, previously the FSF. But did I ask myself, ‘Am I ready? Do I know the nuts and bolts?’; no, I haven’t asked myself these questions.

But you did have an unusual array of experiences: financial markets, central banking experience, treasury, international, economic policymaking, and regulation. It’s pretty formidable. But on the other hand you were Italian.

I don’t think that ever played a significant role in this. But I should say that the six previous years I had spent in institutions like Banca d’Italia and the FSB, the latter of which had led the regulatory response to the great financial crisis at a global level, were a good preparation for chairing the decision-making process of the Governing Council.

As a president, with extensive discussions with the staff and the ECB chief economist, one gathers a deep view of the whole Eurozone, encompassing national views. Bringing this to the Governing Council, together with the collegial exchanges – where participants may be expected to change their minds if facts warrant it – is of utmost importance. That’s why it’s essential that participants should not have dogmatic monetary policy views that cannot be adapted when the facts warrant it.

I think this method worked really well. Of course it becomes harder during a crisis, especially in a heterogeneous zone like the Eurozone, where you have countries that have been doing — by and large — well throughout the crisis and other countries that have done very poorly.

You said we were heading into a crisis pretty fast by the time you took over. So at that point you had to draw up a strategy.

A crisis so dramatic required a powerful monetary policy response with all the then available instruments, including non-conventional ones.

Between February and March 2012, through the three-year LTROs, we avoided a major banking crisis in the Eurozone which would have had devastating effects in many countries in the Eurozone, and we had to face resistance and criticism even at this early stage.

Tell us how you got consensus.

There was no consensus. These were all majority decisions, but there was a very clear majority since the beginning.

Did that worry you; that you had a rump set of dissidents?

It would have been much better if we had had unanimity from the outset. Once I understood that was not going to be the case, it was a necessary price to pay. This was not without consequence. The prior universal view was that the ECB was fundamentally a very conservative central bank. So, it took some time before expansionary moves could be viewed without a certain degree of scepticism. But this only reinforced our determination.

This view — that we could not act without unanimity, especially at times without the largest member countries — played a bigger role at the beginning. But then, especially after the London speech was welcomed by the majority of the Governing Council, this view faded away. The London speech was a defining moment for that reason too.

When investors came on board; yes. How much time did you actually try to spend convincing these dissenting voices?

Time is always necessary, especially when the waters where the Governing Council was to navigate were unchartered. And my colleagues and I still spend a lot of time discussing where we go, what we want to do, and so on.

What was – in your view – your decisive argument?

My argument was that they should try to see that this is not a one-country world, that this is a more complex reality than just one country. And monetary policy should be designed accordingly. I think this is the key.

Reads like a potboiler!

What led to the famous Draghi speech/words: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

Can we go back to this famous dramatic event in London? History has been rewritten, hasn’t it? Because you didn’t actually plan to say it like this.

Well history did turn out differently from what people in the room expected. Some of that had to do with the sense that the overall situation was very serious. Spreads everywhere had widened. The exchange rate was depreciating not because of any other reason than a lack of confidence in our ability to act decisively. The financial system and banking system were widely fragmented.

It was quite clear that much of this was the outcome of a crisis of confidence in the euro. It had to be addressed. It had to be reverted. I was adamant about that. There had been preparatory work in the bank along various lines of possible action.

There had also been steps forward in the previous European Council in June with the launching of the banking union which, together with the just established European crisis mechanism and improved economic governance framework, strengthened EMU. Though these decisions certainly helped, and in fact were mostly based on proposals made by the ECB in the previous three years, the substance of the London speech was fully independent of the Council decisions. There was no deal.

So there had been a remarkable display of unity by the leaders in taking actions that would eventually make our monetary union stronger.

So to be clear, you did intend to make some kind of statement.

I had reflected, consulted and deeply thought about the appropriate message. I knew I had to make it absolutely clear that the ECB would do whatever was necessary, that only bringing certainty to markets that the ECB was unwavering would put a halt to the downward spiral. I was determined to make that point forcefully. And the markets did the rest.

So once you’d said this and it had a market reaction, did you have a clear plan then of what you were going to do to back it up?

A strong commitment to intervene in an unlimited fashion supported by an equally credible commitment of the country concerned. Given the experience with SMP, that commitment needed to be clearly spelled out and backed by a programme with the then EFSF, now the ESM.

The sense is now that it has acted as a nuclear deterrent. You never really needed to draw on it because markets find it so convincing. Were you convinced yourself at the point you created it that markets wouldn’t test it?

The second meeting was in early September. Then we were ready to be tested. The continuation of the favourable market reaction in my eyes showed that it was really a crisis of confidence that we needed to address.

Yes. That was the genius of it. Did you figure that it might have a chance of working that way?

The message was expected to calm the markets, but I also knew this message would be sustained if the countries undertook reforms needed to cement those lower spreads and to produce sustainable growth.

So many trade-offs..

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