FTG Blog - It's Five Years Since Draghi's 'Whatever It Takes'

It’s Five Years Since Draghi’s ‘Whatever It Takes’

Five years ago today, Mario Draghi was talking about bumblebees. The European Central Bank president’s speech in London on July 26, 2012, became instantly famous because of his pledge to do “whatever it takes” to save the euro. But for all the power and clarity of that phrase, he started his remarks more obliquely.

“The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now — and I think people ask “how come?”– probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis.”

At the time, the currency bloc was being buffeted by soaring bond yields in peripheral nations as speculators bet that the union’s fundamental flaws would rip it apart. Draghi’s answer was to state unequivocally that the immediate crisis fell under the ECB’s responsibility and he would deal with it.

“The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

That pledge was followed by a program to buy the debt of stressed countries in return for structural reforms, and in that respect the words alone proved to be enough. Yield spreads have collapsed even though the program has never been tapped.

Draghi’s bumblebee metaphor tends to be forgotten, but his point was this: even with many national governments and more than a dozen different languages dividing the labor force, the single currency can fly. He went further though, saying that it would fly better if European governments overhaul their economies and work more closely together.

On that point, the ECB has less reason to be satisfied with the past five years. The institution has since become the regional banking supervisor but European-level integration has otherwise largely stalled, and Draghi has repeatedly lamented the sluggishness of national economic reforms.

The consequence for the Frankfurt-based ECB has been a heavy reliance on monetary stimulus, with “whatever it takes” evolving into a symbol of Draghi’s determination to keep the euro-zone economy alive.

“There is a strong case that Draghi’s intervention saved the euro zone at that point,” said Nick Kounis, an economist at ABN Amro in Amsterdam. “The risks seemed too high to stand back, but certainly the euro zone does not look institutionally much stronger now than it did in 2012.”

Less than two years after his London speech, Draghi cut the deposit rate below zero for the first time. Shortly after that, the ECB started an asset-purchase program that quickly morphed into 2.3 trillion euros ($2.6 trillion) of quantitative easing and a ballooning balance sheet.

Draghi and his colleagues repeatedly say the ECB cannot be the only game in town, and that member states should use the space that unprecedented stimulus have provided to implement painful reforms to make their economies more efficient. That leeway has been considerable in financial terms, according to a study by the Bundesbank that shows governments have saved around 1 trillion euros since 2007 because of cheaper borrowing costs.

Bundesbank President Jens Weidmann, who opposed the emergency plan that Draghi unveiled in 2012, has argued that the ECB’s aggressive approach is part of the problem. By lowering financing costs so much, governments may find it easier to put off unpopular economic adjustments. Moreover, administrations might be so hooked on cheap debt that the ECB finds it can’t normalize monetary policy without destabilizing the recovery.

Still, five years on, normalization is finally being talked about as a realistic option. The economy probably expanded for a 17th straight quarter in the three months through June, and Draghi has declared that the threat of deflation has disappeared, though consumer-price growth is still short of the ECB’s goal.

The Governing Council intends to discuss the future of its bond-buying program this fall, with most economists expecting purchases to be wound down next year. The ECB says interest rates will remain at current levels until well after the end of QE.

If Draghi’s bumblebee analogy is accurate, he and his successors may be busy for a while. The idea that the insects are physiologically incapable of flight is self-evidently false, but they are inefficient. Research suggests that they cope with their inherent flaws the only way they can: through brute force.