Forging an uncertain path.

Draghi and the Art of the Feasible

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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European Central Bank President Mario Draghi has already surprised many with bold policy moves to buttress the European economy, but you can expect him to lead the ECB toward an additional set of innovative measures. This will probably happen in the autumn, and Draghi's success will continue to hinge on factors outside his, and his central bank colleagues', control.

Just three weeks ago, Draghi implemented a broad range of unconventional measures aimed at stimulating growth, helping credit-starved companies and curtailing the risk of damaging deflation. But in financial markets where the most tangible links between policy and economic improvement are visible, reception to his moves has been rather muted -- exemplified by a euro that remains stubbornly strong relative to other currencies despite Europe's economic circumstances. Meanwhile, recent data confirm that the European economy is expanding, but only timidly, and growth is nowhere near what is needed to deal with the severe unemployment and debt problems still challenging the region.

Europe has also been weighed down by geopolitics and regional political wrangling. Turmoil in Iraq has added to the upward pressure on oil prices already sent aloft by slow progress in resolving the Ukrainian crisis -- thus serving as an added tax on both European consumers and producers. Meanwhile, the battle over Jean-Claude Juncker's appointment as the next president of the European Commission has diverted political energy away from other significant economic policy priorities. And with Italy about to take over the rotating presidency of the European Union, policy bandwidth will have to expand to deal with renewed debates over what constitutes appropriate government intervention in the economy.

Faced with all this, the ECB is likely to again feel compelled to do more to stimulate economic growth even though it is the first to recognize that it is using imperfect tools for that task. The next set of measures -- which will involve greater use of the central bank's balance sheet to keep interest rates low and improve the flow of credit -- will likely come in the fall because the ECB needs time to complete the design and implementation of policies it has already announced.

For the remainder of the year, the ECB will find itself on an experimental path similar, though not identical, to the one that the U.S. Federal Reserve already took between 2011 and 2013. That path forced the Fed to venture ever deeper into unusual policies because others in the U.S. government were either unwilling or unable to step up fully to their responsibilities, even though they had better tools than the Fed at their disposal. The outcome in Europe also will likely be the same as it was in the U.S.: success in avoiding a truly bad economic outcome but frustration in failing to trigger the robust economic liftoff that Europe needs.

Albert Einstein is said to have defined insanity as doing the same thing over and over again while expecting different results. While the ECB has clearly not lost its bearings, it is being forced to operate far away from an arena in which the best European economic and financial policy making is taking place. Like other instances in politically shackled Western economies, the ECB has no choice but to operate experimentally and with a heavy hand in order to pursue what is feasible, even if it's not entirely desirable.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed Aly El-Erian at

To contact the editor on this story:
Timothy L O'Brien at