ECB: Next ECB President Must Keep Up The Pace Of Change

In only a few weeks, European leaders will have to decide on a new ECB President to replace the incumbent Mario Draghi, whose term expires in October. Draghi has been a radical ECB president, deftly playing a difficult political hand to win support for a EUR 2.5trn ECB balance sheet expansion. In a time of crisis he offered "whatever it takes" to save the euro. We can now believe his claim that he would do enough to restore financial stability to the eurozone. Yet the ECB's work in terms of monetary policy, regulation and eurozone financial integration is far from complete. Unlike Draghi, the incoming ECB President faces no immediate crisis. However, politically challenging further convergence of fiscal trajectories, economic growth and bank sector regulation is required to ensure the long-term viability of the eurozone project. We believe markets would applaud an ECB President offering policy continuity in the short-term combined with the experience and political skills to ultimately drive further eurozone integration.

President Mario Draghi's key achievement was to break the taboos that had paralysed ECB policymaking and left the weaker members of the eurozone at the mercy of volatile international capital flows and financial speculators. His "whatever it takes" speech in 2012 possibly defined his ECB Presidency. This speech was followed in 2015 by a EUR 2.5trn expansion of the ECB's balance sheet, a policy critical to re-establishing the convergence of interest rates and control over monetary policy across the eurozone. His and other ECB officials' measured communications during his tenure, both on and off the record, have carefully guided eurozone markets away from scenarios which could have impinged on the recovery later in the decade.

Yet while investors can praise Draghi's determination to act in a time of crisis, inflation forecasts have been consistently missed even during the eurozone's post-crisis expansion. In this regard, the ECB is not alone, as the unanticipated absence of inflationary pressure while GDP growth accelerated was a phenomenon observed across developed markets during this decade. Nevertheless, at the end of Draghi's tenure it leaves ECB policy at an unusual setting with negative interest rates, new credit easing initiatives underway and dovish forward guidance, all despite several years of economic recovery.

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