Europe needs more Draghi

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The euro area can cope in good times without a president like Draghi. But who else would be as potent and able to do whatever it takes, again, when the next crisis hits?  

The term of the president of the European central bank Mr. Mario Draghi is approaching its end. Mr. Draghi has turned out to be an outstanding leader, who has skilfully managed the market’s expectations and convinced the sceptics about the required implementation of the central bank’s monetary policy. He has made whatever it takes to protect the euro.

The acute crisis is behind, but nevertheless there are important and capital issues to resolve. Forming the banking union and a European deposit insurance scheme are still half way. There are still bank’s balance sheets to be cleaned here and there, despite that the banking system today is more resilient than before the crisis.

The increase in public debt has stabilized, but will the crust hold and commitments to austerity stay in place when the next economic downturn occurs? Unfortunately, the EU countries track records are not convincing.

Also, the balance sheet of the central bank has ballooned. It’s tapering will be one of the greatest challenges during the coming years.

The global economic environment is also turbulent. Trade relations are strained, and export growth is not evident. The risk of external shocks is present.

Populistic movements are running high as the European Union ponders its existence. The temptation to loosen financial policies for winning political popularity are high in many countries.

The continuity and credibility of the central bank is now more crucial than ever. The ECB needs a successor who is as regarded as Mr. Draghi. Unless Mr. Draghi’s tenure is extended.

Credible names are scarce. The president of the Bundesbank Mr. Jens Weideman is disputable. The Germans have been, certainly with good reason, sceptical to strong monetary stimulus, but a too speedy revamp of the monetary policy could tear up old wounds.

The euro area can cope in good times without a president like Draghi. But who else would be as potent and able to do whatever it takes, again, when the next crisis hits? The next president of the central bank is not needed for good times, but for the bad times.

 

The opinions expressed in this article are the author's own and do not reflect the view of Evli Bank.