Aren’t we underestimating the role of the governor of the European Central Bank, Mario Draghi? Only last week, market pressure was piling up against Draghi for him to offer a counter-action that could balance the US Federal Reserve’s announced intention of cutting down its monetary injections to help the economy recover.
In more than one way, if markets now look relatively calm is due to Draghi’s intervention, in which he assured low interest rates in the Eurozone will remain for a long time. And he did that with a limited mandate and looming general elections in Germany: expansionary monetary measures don’t come easy for the ECB, even less so taking into account that the Bundesbank and the German electorate abhor any move that could generate inflation.
But Draghi managed to infect the markets with optimism, in spite of all difficulties. He isn’t just a remarkable central banker, but is increasingly becoming clear he is a great communicator and diplomat.
Draghi has guaranteed interest rates that will not pose further problems in an environment of credit scarcity, and his warnings about sovereign bond purchases when necessary has supported demand for Eurozone government debt. His mention of the possibility of negative rates on banking deposits–forcing Eurozone banks to give their money other destinations instead of staying idle in Frankfurt–adds to a discourse that sounds attractive enough for markets not to tumble.
And in the end, that is all what we should expect from our central banker.
Let us be fair with Draghi: he is in charge of an institution that, unlike its peers, has very restricted powers and legal barriers he has sorted with precision. The market reaction confirms his decisions were the right ones, by the way; credit costs have fallen, the euro has a competitive exchange rate and equity markets are up.
Critics of the ECB governor will have a hard time trying to convince us that the opposite situation would be better.