A Retrospective on the ECB’s Stimulus Measures: Successes, Legal Challenges & Unintended Consequences

In May of 2017, Mario Draghi, then-President of the European Central Bank (ECB), faced intense scrutiny from Dutch Members of Parliament during a meeting regarding the ECB's efforts to revive the Eurozone economy. The measures, initiated in response to the lingering fragility following the 2008 financial crisis, included a range of unconventional monetary policies aimed at stimulating growth and reducing unemployment. At the heart of this criticism was a symbolic gesture: the presentation of a solar-powered tulip to Draghi; a reminder of the infamous Tulip Mania asset bubble in 17th-century Netherlands.

This article provides an analysis of whether the ECB succeeded in its goals of job creation and economic growth and also examines some of the unintended consequences of its actions.

The Eurozone Economic Context (2017)

In the years following the 2008 financial crisis, the Eurozone faced significant economic challenges. The initial shock of the crisis led to a severe recession, and the recovery was slow and uneven. By 2017, many Eurozone countries were still grappling with high unemployment rates, sluggish economic growth and deflationary pressures. The traditional monetary policy tools had proven insufficient, prompting the ECB to adopt more aggressive measures to stabilize the economy.

ECB’s Stimulus Measures

Quantitative Easing (QE)

One of the most notable measures was Quantitative Easing (QE), which involved large-scale purchases of government and corporate bonds. This influx of liquidity into the financial system was designed to lower interest rates, encourage borrowing and investment, and ultimately stimulate economic activity.

Negative Interest Rates

In an unprecedented move, the ECB also implemented negative interest rates, reducing the deposit facility rate below zero. This policy aimed to incentivize banks to lend more aggressively by penalizing them for holding excess reserves.

Targeted Longer-Term Refinancing Operations (TLTROs)

The TLTROs provided cheap loans to banks, contingent on their lending behaviour. These operations targeted the real economy by ensuring that banks passed on the low-cost funding to businesses and households, thereby supporting investment and consumption.

Asset Purchase Programmes (APP)

The ECB expanded its Asset Purchase Programmes (APP), buying a variety of assets to inject liquidity into the financial system. This comprehensive approach was intended to support all sectors of the economy, from small businesses to large corporations.

Impact on Employment & Growth

Employment Trends (2017-2024)

The ECB's measures had a notable impact on employment across the Eurozone. Between 2017 and 2024, the unemployment rate in the Eurozone decreased significantly. Countries like Germany and France saw substantial improvements, with Germany's unemployment rate falling to historically low levels. In contrast, southern European countries such as Greece and Spain experienced a slower recovery, though their job markets also showed signs of improvement.

Sectoral Analysis

Different sectors responded variably to the ECB's stimulus measures. The manufacturing sector benefited from increased investment and exports, while the services sector saw growth driven by higher consumer spending. The technology sector, in particular, experienced robust job creation due to increased innovation and investment facilitated by the low-interest environment.

Economic Growth

The ECB's interventions also contributed to a notable improvement in economic growth. GDP growth rates in the Eurozone showed a positive trend from 2017 onwards. For instance, Germany's GDP growth rate averaged around 1.5-2% per year, while Spain, recovering from a severe recession, experienced growth rates exceeding 3% in some years.

Investment & Consumer Spending

The low-interest environment spurred investment across the Eurozone, with businesses taking advantage of cheap financing to expand operations and innovate. Consumer spending also increased as households benefited from lower borrowing costs and improved labour market conditions.

Regional Disparities

While the overall economic growth was positive, regional disparities persisted. Northern European countries, with stronger fiscal positions, recovered more quickly compared to their southern counterparts. However, the ECB's measures helped to narrow these disparities over time by fostering a more synchronized economic recovery across the Eurozone.

Compliance with EU Treaties

Legal Framework

The ECB's unconventional monetary policies raised questions about their compliance with EU treaties, particularly the Maastricht Treaty and the Lisbon Treaty. These treaties include provisions such as the no bailout clause and the prohibition of direct financing of governments, designed to maintain fiscal discipline and prevent moral hazard.

Controversies & Legal Challenges

The ECB faced criticisms from various member states, particularly Germany, where concerns about sovereignty and the potential for creating moral hazard were prominent. Critics argued that the ECB's bond purchases amounted to indirect financing of governments, potentially undermining fiscal discipline.

European Court of Justice (ECJ) Rulings

The legality of the ECB's measures was challenged in several cases brought before the European Court of Justice (ECJ). In landmark rulings, the ECJ generally upheld the ECB's actions, recognizing the necessity of these measures to ensure price stability and support economic recovery. The court's decisions emphasized the ECB's mandate to maintain financial stability and its discretion in choosing appropriate policy tools.

Balance Between Legal Constraints & Economic Necessity

The ECB's ability to navigate the legal constraints while implementing effective policies highlighted its role as a pivotal institution in the Eurozone's economic governance. The balance struck between adhering to treaty provisions and addressing economic realities underscored the flexibility and adaptability required to manage complex economic crises.

Historical Parallel

The presentation of the solar-powered tulip to Mario Draghi was a poignant reminder of the Tulip Mania, a speculative bubble in 17th-century Netherlands where tulip bulb prices soared to extraordinary levels before collapsing. This episode is often cited as one of the first recorded speculative bubbles, illustrating the dangers of unchecked market speculation and asset price inflation. The symbolic gesture served as a cautionary tale, highlighting the need for prudent and sustainable economic policies.

The tulip symbolized the risks associated with excessive speculation and the potential for financial crises when asset bubbles burst. It was a reminder for the ECB to remain vigilant and avoid policies that could inadvertently fuel similar bubbles in the modern economy.

Mario Draghi's tenure as ECB President marked a period of significant intervention aimed at reviving the Eurozone economy. The ECB's unconventional monetary policies, including QE, negative interest rates and TLTROs, were instrumental in reducing unemployment and fostering economic growth. Despite legal challenges and criticisms, the ECB navigated these constraints effectively, balancing the need for aggressive action with adherence to EU treaty provisions.

Nevertheless, despite the perceived success of Draghi's tenure, many believe that the Eurozone continues to suffer from some of the unintended consequences of the loose monetary policies he advocated.

The Unintended Consequences

Inflation

In 2021 and 2022, inflation surged in the Eurozone due to various factors. Although inflation decreased by 2024, the true impact on households remains a subject of debate.

This is because the European Central Bank’s primary inflation index (HICP) excludes energy, food, tobacco and alcohol; potentially understating the actual inflation experienced by households.

When the money supply expands within a market, it triggers a corresponding increase in the prices of goods and services due to shifts in supply and demand dynamics. As a result, the spectre of long-term inflation continues to loom, presenting an ongoing challenge that could endure into the foreseeable future.

Asset Class Distortion

In 2022, when central banks raised interest rates to tackle inflation, bonds suffered some of their poorest annual returns on record. In essence, the asset class, typically viewed as a safe haven with lower risk and offering investment diversification, posted negative returns more akin to those of an equity fund. This irony is heightened by the fact that risk assessments, as determined by MIFID/ PRIIPS standards, proved largely ineffective given prevailing market conditions.

Some may argue that, when a market endures years of negative issued debt, tangible side effects are an inevitability; destined to reshape the landscape of financial realities. As the burden of debt grows heavier, the market's resilience is tested and cracks begin to emerge; potentially heralding an era where consequences once deemed theoretical become palpable and unavoidable.

Low Interest Rates

A simple Google search for "Belgium low savings rates" yields several articles highlighting a prevalent issue within the savings and lending market. Essentially, savers are finding themselves inadequately compensated by annual interest rates, relative to the demands of the lending market.

According to the National Bank of Belgium (NBB), the average mortgage rate surpassed 5% in the first quarter of 2024. However, the main deposit facility rate from the European Central Bank (ECB) to banks stands at 4%. Is it a coincidence, therefore, that most Belgian banks reported healthy profits in 2023?

As a footnote, and according to a recent Financial Times article, the ECB is poised to begin cutting interest rates at the upcoming bank meeting on June 6th, 2024. This move would be particularly intriguing as it would precede any action by the Federal Reserve.

Monnet Capital

At Monnet Capital, we understand the challenges of navigating monetary and fiscal policies in the context of personal financial planning. While there are no overnight fixes for optimizing a financial strategy, we offer viable investment solutions designed to assist with income generation, capital preservation and long-term growth.

Click the Button Below To Access Your Complimentary Financial Guides

Download NOW