44 FINANCE & DEVELOPMENT | September 2019
IN THE TRENCHES
PHOTO: COURT ESY OF TH E EUROPE AN CENTR AL BANK
Convincing the Markets
Peter Praet revisits the ECB’s unconventional
monetary policy response to the euro crisis
BELGIAN CENTRAL BANKER
Peter Praet retired in June
2019 after an eight-year run on the executive board
of the European Central Bank (ECB), where he
served as chief economist. Reecting on his time
on the front lines, Praet shared with journa list
Rebecca Christ ie the high points of his tenure. e
interview take s us behind the scenes of Europe’s
sovereign debt crisis leading up to ECB President
Mario Draghi ’s famous July 2012 promise to do
“whatever it takes” to protect the euro —an unprec-
edented pledge designed to quell market pan ic and
give policymakers t ime to follow through on their
crisis-ghting commitments —and the subsequent
challenge of revivi ng the euro area economy in a
time of negative interest rates.
F&D: What was t he atmosphere like at the ECB
when you arrived?
PP: I came to ECB in June 2011, a few years af ter
the crisis began, a nd I became chief economist in
January 2012. It was not pleasant because it was
a panic environment similar to what I h ad lived
through during t he Belgian banking crisi s of 2008
and 2009. But this time it was a ma rket panic. In
these situations, you have to be mentally prepared
for the worst and be ready to take bold measu res.
When I came in 2011, the rst decision we faced,
in July, was whether to increase interest rates. I
was not chief economist at that ti me. I can tell
you now that I was in favor.
e mind-set then was stil l, in spite of the
nancial crisis, very much to avoid certain
second-round eects related to oil price increase s.
Ination was at about 3 percent at that ti me, and
there were some wage pressures. at wa s one part
of the story.
e other part of the story was t he follow-up
of the nancial crisis, and we had tensions in the
sovereign debt markets at that time a s well. e
stance in 2011 became a bit more restrictive. e
rst interest rate hike wa s in the spring, and then
there was a second hike in July when I ca me. But
the nancial cri sis was still considered at that time
as something manageable by abundant liquidity
provision to the nancial sector.
Now we know that things didn’t go that way.
What happened when you re alized t hat
things weren’t getting better, even a fter oil
prices star ted to fall?
PP: e situation was totally di erent by then.
And so we started to ta lk about a radical ly
dierent sort of framework for monetar y policy,
given a situation that was more ak in to disina-
tion, or worse.
F&D: How much could European leaders a ccom-
plish with thei r plans to create a ban king union,
with common euro a rea supervi sion and a
sovereign debt firewall, the Eu ropean
Stability Mec hanism? W hat could be done
only by the ECB?
PP: e market panic of 2012 could only be stopped
by Mario Draghi. Of course, the background for
the success of his “whatever it ta kes” line was
the June European Council meeti ng of heads of
state and governments, about putting in place t he
banking union and crisis management mecha-
nisms. So that was t he political backgrou nd.
To give credit to Mario, when you have to stop a
panic you need strong communication sk ills. You
have to be able to convince markets. “W hatever it
takes” was well chosen.