The unintended consequences of “whatever it takes”

The European Central Bank certainly did “whatever it takes” to preserve the euro during Mario Draghi’s presidency. “Whatever it takes” is often interpreted as equivalent to the Outright Monetary Transactions programme, announced soon after Draghi’s London speech of 26 July 2012, to address markets’ fear of the breakup of the euro, which the ECB considered unfounded. The reality, however, is that the OMT, despite its high profile and the calming impact its announcement had on markets, was never used. Perhaps it was never needed, because it was only one of many measures introduced after the onset of the crisis to save the euro. Others included a range of Eurosystem actions targeted at addressing market liquidity, including the relaxation of collateral rules, the provision of emergency liquidity assistance by national central banks and the introduction of non-standard measures aimed at redenomination fears and the subsequent risk of deflation. In addition, the ECB played an active part in the creation of the first two pillars of the banking union – the Single Supervisory Mechanism and the Single Resolution Mechanism.

Although Draghi is widely credited with “whatever it takes” – and there is no doubt that it was he who coined that term in his famous London speech – the policy of doing everything possible to save the euro actually started under the presidency of Jean-Claude Trichet, albeit more opaquely, with the introduction of the Securities Market Programme (SMP) in May 2010. The programme involved buying sovereign bonds of crisis-stricken countries – Greece, Ireland, Portugal, Spain and Italy – in secondary markets. The SMP was successful in terms of reassuring markets and reducing yields but was highly controversial, not least because it was lacking in transparency; the ECB never announced details of the amounts purchased nor the targeted securities when the programme was active. It was also widely seen as uncomfortably close to breaching the monetary financing prohibition, as it eased pressure on governments to reduce deficits. Criticism of the SMP by former ECB chief economist Otmar Issing goes even further: he suggests that the ECB was breaching its own independence by helping to bail out countries such as Greece, Ireland and Portugal (Issing 2018).