Every central banker has a make-or-break moment. As the euro crisis raged in 2012, then-European Central Bank boss Mario Draghi took to describing the common currency as a “bumblebee”: We may not know exactly how this imperfect monetary union flies, but it does. Unsurprisingly, this didn't do the trick. Only a few months later, with the bee in danger of smashing into the proverbial windshield, did Draghi harness existential pressure to take the ECB into a new era of "whatever it takes."
The euro isn’t in crisis today, but some of that bumblebee-like complacency is visible. The whatever-it-takes spirit hasn’t been enough to spur investment, growth and confidence in a euro zone that's being pulled apart by North-South economic imbalances and East-West geopolitical divides. Draghi’s recent guide to removing structural barriers to growth is dangerously close to gathering dust.
With Donald Trump's tariff threats looming and China's export machine whirring to life again, a make-or-break moment looms now for Christine Lagarde, Draghi’s successor as “Madame Euro.” The leadership void in France and Germany demands an institution like the ECB to step up -- as Draghi’s did more than a decade ago. There’s been some welcome recognition of the urgency of the situation with four interest-rate cuts since June. Yet at the same time, the heavy artillery remains firmly in the lockbox and the language of the ECB remains guarded.
It’s time to bring growth rather than inflation-busting back onto the agenda, as we have argued before: Nothing less than the geopolitical relevance of Europe is at stake. Since 2019, gross domestic product per capita is up 2.5% in the euro area compared with 7.9% in the US. GDP growth in the bloc is expected to come in below 1% this year. Euro central bankers’ oft-repeated mantra that monetary policy can’t do everything is true but also shortsighted given huge investment needs in technology, defense and climate over the next decade.
Cutting rates aggressively to spur growth is a delicate exercise — do too much too quickly and you risk stoking inflation or turning the euro’s latest slide versus the dollar into a confidence-sapping tailspin. Yet the danger right now is of doing too little at a time when euro governments are being pressured to curb deficits and debt, choking demand even further. Spurring domestic consumption and investment is going to be paramount in a more protectionist world — and requires monetary policy and fiscal policy to go in the same direction.
Papering over old cracks won’t be enough -- nor will references to the "mandate" of the ECB being foremost about price stability. It actually has a dual mandate encompassing financial stability - recessionary conditions can easily disrupt the smoothness of monetary transmission. Recent comments by Bank of France chief Francois Villeroy de Galhau, who took care to present himself as aligned with the Bundesbank’s Joachim Nagel, have been encouraging in this regard. He made clear that while price stability was the ECB's primary objective, the bank must also "pay close attention" to the risk of "undershooting our inflation target, and of keeping economic activity unnecessarily subdued." He also made clear that addressing topics outside of monetary policy was the responsibility of a central bank. "If we do not defend open trade, with fair rules, who will?"
Sticking to an overly cautious script could also see popular frustration shift toward central bankers rather than just incumbent politicians who are falling like dominoes and feeding populist gains. Some European corporate leaders are starting to privately criticize the ECB’s handling of monetary policy, holding it principally responsible for Europe's decline relative to the US, from its overly bureaucratic supervision of the banking sector to its overly tight monetary policy. This should worry Frankfurt: How long before international investors and executives start to openly question the longevity of the euro?
Overall, the message should be that it’s time for Lagarde and the ECB to take a more active leadership role. This has risks, but also rewards, if monetary policy moves in tandem with fiscal rather than against it. “Central bankers tried to say for a long time they weren’t the only game in town...Now, because of political failures, they are,” says David Marsh, chairman of the Official Monetary and Financial Institutions Forum think tank and author of several books on the euro. Time for the bumblebee to flap harder.
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