The European Central Bank under Draghi pushed monetary policy into new realms. No central banker could have done more to combat the aftershocks of the financial crisis. But for all his effort, a corresponding lack of the stuff among eurozone governments means that he leaves the bank scarcely any closer to its inflation target than when he took over.
His policies have been the driving force behind European debt markets for eight years and have left half of European government bonds carrying a negative yield. Despite this, the average inflation rate during his tenure has been 1.2% — a far cry from official target of “close to but below 2%”.
Negative rates and vast quantitative easing programmes have two dangerous consequences. First, investors’ portfolios are stuffed with negative yielding assets. Although the ECB’s elephantine presence in bond markets caused asset prices to soar, there has to be a limit when yields can plumb no deeper.
Without capital appreciation, Europe’s pension funds will face a colossal shortfall as an ageing population discovers that funds invested in government debt did not grow as required. The only viable alternative will have been to buy riskier credits, with all the losses that would entail.
Borrowers are more engorged than ever with debt, spurred on by cheap borrowing costs. The eurozone is groaning under an enormous debt burden. But growth is slow and so default risks must rise.
Among corporate borrowers a recession will prove tricky enough; but if the problem grows to encompass countries with high debt-to-GDP ratios, it seems the traditional escape route of inflating away the burden will no be longer possible.
This newspaper has lamented for years the lack of an exit plan, or alternative, to quantitative easing. Draghi did what he had to do to keep the eurozone together. Investors have not stopped buying debt yet, even when they are set to redeem less than they paid for it at maturity.
But Europe’s failure to wean itself off official stimulus will only have stored up a bigger debt that must be paid by future Europeans.