As the euro crisis continued to worsen, the head of the ECB at the time, Mario Draghi, intervened with a pithy announcement and turned things around. Almost ten years after that speech, we have an inflationary crisis. Clear words are required again.
It was July 26, 2012 at the Global Investment Conference in London when Mario Draghi spoke this now legendary sentence: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” (“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”)
After the clear commitment to the euro, the debt crisis calmed down almost immediately. Investors gained confidence that the ECB would hold the euro area together and that debt-ridden states such as Greece and Italy would be prevented from going bankrupt. Interest rates fell again – of course also because the ECB didn’t just leave it at words, but also started a bond purchase program.
A good ten years later, hardly anyone is talking about the debt crisis. But again, people worry about their money. The big issue now is inflation. In many countries, the increase is the highest it has been in decades. In Germany, the value was more than seven percent, almost twelve percent in the Netherlands and almost 15 percent in Estonia. People are wondering how they can still pay for their purchases and what their savings will be worth in a few months.
The eyes are directed to Frankfurt to the ECB headquarters. But there is no signal from the mirrored Sky Tower on the Main that the currency watchdogs are really taking the concerns seriously. Instead just wait and see. The Finnish central bank Olli Rehn, for example, only believes that the “gradual process of monetary policy normalization” should be continued. At the last meeting, minutes argued that “model-based estimates” suggested that the “natural real rate” was still negative. Therefore, even small interest rate hikes would be enough to slow down inflation.
By hesitating, the ECB is risking further losing people’s trust. A rate hike of 0.25 percentage points, which is being discussed for July, sounds like mockery with an inflation rate of over seven percent. When it came to reassuring investors and markets, Draghi found clear words. Why is the ECB pushing around now when it comes to citizens’ fears?
It’s time for something like a new whatever it takes moment. It’s time for ECB President Christine Lagarde to make a clear commitment to the central bank’s original mandate: “We take your concerns seriously and will take up the fight against inflation!” And believe me: We will make it.” These signals come from the US Federal Reserve. The head of the central bank, Jay Powell, has made it clear here that he will also take action against high inflation at the expense of a recession.
Such a commitment must now also come from Frankfurt. Lagarde would emphasize that the ECB is not only there for the states and their financing problems, as the central bank is often accused, but also for the citizens. The ECB has lost a lot of its credibility in recent years. Now she has a chance to take it back.