Departing Draghi leaves divided ECB to Lagarde

Tom BARFIELD
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European Central Bank president Mario Draghi is credited with saving the euro but also accused of dividing the bank's governing council

Departing European Central Bank president Mario Draghi will leave a conflicting legacy after chairing his final governing council meeting on Thursday, credited with saving the euro but dividing the institution with his easy-money policy.

The gathering "is unlikely to be the good-natured celebration of his achievements that he might have hoped for," said analyst Jack Allen-Reynolds of Capital Economics.

"Attention will focus on the growing divisions" among policymakers left by a September stimulus package, he predicted.

Among the 25-strong council, "the loss of teamwork and comradeship has now burst into public", agreed Dirk Schumacher of Natixis bank.

"That in itself is undermining to some degree the effectiveness of the ECB," he added -- just when it needs to convince watchers it can support the economy in future.

Seen as a solo artist who succeeded in bending the institution to his vision for the eurozone economy, Draghi is credited above all with saving the euro during its existential debt crisis.

That rescue came only with help from hefty cash injections and historic low interest rates -- earning him the ire of conservatives, especially in Germany, who say he has harmed savers.

As he departs, Draghi leaves his successor Christine Lagarde to confront a eurozone apparently running out of steam after five years of recovery added 11 million jobs.

Last week, the IMF forecast eurozone economic growth of just 1.2 percent this year and 1.4 percent in 2020.

- Battle lines -

Since 2011, Draghi has lowered interest rates into negative territory, bought 2.6 trillion euros ($2.9 trillion) of government and corporate debt and issued hundreds of billions in cheap loans to banks.

An official account of September's governing council meeting showed broad agreement on the need for further supportive steps, as the ECB's own forecasts showed inflation falling short of its just-below-two-percent target out to 2021.

But disagreement erupted over how powerful the response should be.

Most controversial was restarting "quantitative easing" (QE) bond purchases, which had been idling since December 2018.

The scheme, aimed at boosting growth and, indirectly, inflation, has always split policymakers.

This time, backers argued it should "ward off future shocks affecting the eurozone, which raise fears of deflation", while opponents including the German and -- unusually -- French central bank chiefs believed it would have a "minimal effect", Mirabaud bank economist Valentin Bissat said.

Capital Economics' Allen-Reynolds warned that the acrimony "raises questions about the decision's legitimacy and whether the council could ever agree to expand its asset purchases further" if needed.

A need for increased stimulus cannot be ruled out in the coming months and years.

Meanwhile, Europe's trade face-off with the US ratcheted up Friday as Washington imposed new tariffs over illegal subsidies to plane builder Airbus.

And Britain's exit from the EU remained mired in uncertainty after MPs refused to back Prime Minister Boris Johnson's new Brexit deal at the weekend.

- Time for fiscal policy? -

As external headwinds have grown fiercer, calls from the ECB for governments to loosen their purse strings have grown louder.

"The ECB is rightly worried about the balance between monetary and fiscal policy" after years fighting its battles almost alone, economist Christian Odendahl of the Centre for European Reform told AFP.

With the governing council divided over further stimulus and threats from abroad, rather than at home, weighing heaviest, former IMF chief Lagarde "will have to call for fiscal support to fulfil the ECB's mandate" on inflation, he added.

In her European Parliament confirmation hearing last month, she harked back to Draghi's 2012 promise to do "whatever it takes" to preserve the euro.

"I hope I will never have to say something like that, I really do, because if I had it would mean the other economic policy makers are not doing what they have to do," Lagarde told the Brussels lawmakers.

Later in September, German Chancellor Angela Merkel said governments shouldn't "overstretch" monetary policy in an apparent recognition of the ECB's woes.