Draghi's feeble trend reversal

The US central bank, the Federal Reserve, has a double mission: Achieving stable, low inflation, and fostering a low-unemployment economy. At present the Fed is out to crank up the domestic economy, while Europe's currency guardians are more focused on ensuring stable prices. But the ECB tends to follow the Fed's lead, because if it were to fail to do so, the dollar - to - euro exchange rate would get out-of-whack, with severe consequences for European export businesses.

One thing's for sure, everything the ECB does is bound to have an impact on cyclical developments. And the ECB has been doing a lot. 

The eurozone economy had been in a bad state for quite a while, as a result of the global financial crisis that started in the US as a result of a vast housing-price bubble driven by mortgage over-lending. European banks and investors foolishly bought huge amounts of US real-estate securities packaged and sold - fraudulently - as very safe investments. As a result, when the US real estate bubble popped, so did the balance sheets of many European banks.

European governments were forced to rescue Europe's banks with billions upon billions of euros in taxpayer money. In the wake of the crisis, governments poured money into banks, and cut back spending on other priorities. Many eurozone member states slid into recession.

But in many cases, the crisis revealed a number of home-made problems, such as a lack of economic reforms and the lack of a working mechanism to redress imbalances in member states' relative economic performances.

The bazooka option

The eurozone crisis that flared up in 2011 put Europe's central bankers at the center of economic policy-making. Following the Fed's lead, the ECB too gradually reduced interest rates to zero over the past decade. Speculators betting on the eurozone's demise were defeated by ECB chief Mario Draghi on July 26, 2012, when he said during a speech in London that the ECB would "do whatever it takes" to save the euro.

Read more: Can we avoid another financial crisis?

But eurozone economies weren't doing too well, and consumer prices didn't pick up toward a 2-percent inflation rate, which the ECB deems to be its target for price stability. With interest rates at the zero lower bound, Draghi needed some other policy lever. In 2015, he pulled out the ECB's big guns, launching a huge bond-buying program, absorbing financial assets from ailing economies.

The idea was to flood money into the financial system, with the effect of reducing short- and long-term interest rates, thereby encouraging governments and companies to refinance their debt burdens, in the hope of creating financial room for them to invest again on a large scale.

Draghi's shopping spree has entailed the use of the ECB's balance sheet to purchase financial assets, mostly government bonds and some corporate bonds, to the tune of 60 billion euros a month, logging a gigantic total of 2.3 trillion euros since the bond-buying program began in 2015 — a mind-boggling figure.

Volatile markets

Ever since Draghi started pursuing his bazooka tactics, skeptics in Germany and Europe have challenged the program in court. German and European high courts were tasked with investigating whether the bond-buying program is really covered by the central bank's mandate.

So far, judges have ruled in favor of the ECB. But the bank is nonetheless preparing for an exit from the program, albeit in a gradual and orderly fashion so as not to shock the highly sensitive financial markets - where share prices and bond prices have been pumped up to sky-high levels from the flood of money pouring in from the ECB's asset purchases.

Economists note that the Fed's first hints at tapering its own bond-buying program a couple of years ago resulted in many investors withdrawing capital from emerging economies, with dire consequences for those countries. It will be interesting to see what happens now that the ECB has decided to cut its asset purchases by half, while at the same time extending the program until at least September 2018, in a bid to balance everyone's interests.

It's a step toward normalizing the EU's monetary policy, but the ECB intends to stick to its zero-interest strategy for a long time to come — to the chagrin especially of German savers, for whom financial gains through interest payments on bank deposits are a fading memory of times gone by. The ECB's policy has also weighed heavily on banks and insurance companies, who have struggled to make money in an environment of ultra-low interest rates.

An additional pernicious side effect of the ECB's bond purchases is that a bubble has been building in the German real estate market, with investors pumping huge sums into real estate, from a lack of other sound investment opportunities.

All of that has seen Draghi draw massive criticism in Germany - but much less criticism in his home country, Italy. There, his policy acts like a sedative pill, allowing policymakers to carry on as before, and change nothing.

Draghi fans may counter by saying that Europe's economy has been on the mend again, so what's the fuss about?

The moment of truth is yet to come, at some point in the future when the ECB will finally be forced to gradually hike interest rates. The timing will depend, once again, to a large extent on the ECB's having to follow the Federal Reserve's lead, in order to manage the exchange rate between the dollar and the euro. Markets have some time to brace for this step as it will most likely not happen before 2019.