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After eight years in office, will Mario Draghi be remembered as a hero or zero?

25 October 2019

On Thursday, Mario Draghi held his last press conference as President of the European Central Bank (ECB), as he hands over the reins to Christine Lagarde. Making now the opportune time to look back at his eight years in office.

Draghi came into office as the Greek crisis was unfolding and, just months later, the yield on ten-year Greek government bonds hit 35%. Today, ten-year Greek government bonds yield just 1.2% and the euro has fallen close to 20% against the dollar, having seen off a crisis that threatened the existence of the currency union. Peripheral countries, infamously referred to as the "PIIGS" (Portugal, Italy, Ireland, Greece and Spain), can now fund themselves at record low rates. Draghi will be remembered for his "whatever it takes" approach in support of the Eurozone; however, Europe is not out of the woods yet. Just last month, the ECB announced a further rate cut, pushing the deposit rate deeper into negative territory, and a resumption of its asset purchase programme. For now, euro area growth remains anaemic, at best, and inflation remains stubbornly below the ECB's 2% target rate. 

On a more positive note, unemployment has fallen from 12.5% in 2013 to 7.5% today, reaching the best level since the 2008/9 financial crisis. Draghi's time in office has also been positive for equity investors: the MSCI Euro Index has averaged over 10% per annum during his tenure, performing better than the UK FTSE All-Share Index, which has returned just over 8% per annum. However, both these have lagged the performance of US equities, whereby the S&P 500 Index has returned an average of over 17% per annum, in euro terms. With interest rates continuing to fall, Eurozone government bonds have provided an average annualised total return of 5%. 

Investors and savers sitting on cash are presented with a difficult dilemma, as many bonds now offer negative yields. Savers can now lock-in negative returns or take an increasing level of risk for potentially positive returns. Banks, who are vital for Eurozone economic growth, have been depressed by increasing capital requirements and negative interest rates. As such, the Euro STOXX Bank Index has only returned a mere 3.3%, on an annualised basis, over Draghi's tenure. However, over the last eight years, for the majority of investors, Mario Draghi has been a hero. From an economic perspective, he may have rescued Europe from a much worse fate; but with interest rates at less than zero and their potential side effects, the jury will have to be out on his time in office for some time to come.

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