Irrational exuberance?

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Draghi's Message to European Political Leaders

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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As the European Central Bank's Governing Council meeting concluded Thursday, President Mario Draghi stressed four points whose significance extends well beyond markets and the economy. Europe's political leaders should heed his message and translate it into credible economic measures.

QuickTake Europe's QE Quandary

1. Once again, monetary policy has been effective in preventing really bad outcomes. Indeed, without the additional bold measures the ECB announced in March, the global financial market turmoil of January and February would have led to a Europe-wide deflationary growth compression.

2. Even though aggressive ECB policy can lower the risk of really bad outcomes, it cannot deliver what is really needed: sustained high economic growth. As Draghi correctly pointed out, achieving that result would require governments to share the policy burden with the central bank and deploy a range of productivity- and demand-enhancing measures. Draghi stressed the need for public infrastructure spending and "more growth-friendly" fiscal stances.

3. Because Europe also is exposed to non-economic shocks -- including unsettling political developments in member states, as well as the risk that the U.K could leave the EU -- political leaders also need to strengthen the euro zone's economic and financial architecture. This involves completing the banking union, reaching consensus on the path of greater fiscal integration and showing stronger political unity.

4. No single institution now will accept the task of taking the lead in handling some tricky countries -- and Greece in particular -- after so many recurrent disappointments. But the preferred alternative -- the hope of simultaneous action -- is undermined by the lack of sufficient mutual confidence among the creditors (namely, European governments, the Commission, the ECB, and the International Monetary Fund but also between these institutions and Greece).

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