«In ’72 I came to study here and we overcame difficult challenges. Now we will be able to do the same»- Corriere.it

On his first trip to the United States after the end of his government (October 2022), Mario Draghi launched a message and an appeal. The message is that inflation could last longer than one thinks, even if eventually the joint action of central banks and governments will be able to bring price dynamics under control. The appeal to progress in the enlargement of the European Union, integrating Ukraine into it and strengthening the common defense policy, allowing Ukraine itself to join NATO. Draghi spoke yesterday at the Massachusetts Institute of Technology at MIT, where he received the Miriam Pozen award and held a Lectures which, as he himself said, draws on my experiences as a central banker (at the head of the ECB from 2011 to 2019, edand chairman of the board.

Paradigm shift

The war in Ukraine and the return of inflation, together with the growing tensions with China, have brought about a paradigm shift that has quietly shifted global geopolitics from competition to conflict. With lasting consequences that could manifest themselves in a lower rate of potential growth, which will require policies that lead to budget deficits and higher interest rates, Draghi warns. Globalization that was thought to be unstoppable and a harbinger of liberal and democratic values ​​all over the world has entered a crisis. While we were busy celebrating the end of history, history was preparing its return by taking national institutions by surprise. Yet, according to Draghi, the signals coming from Russia were clear and for a long time, with the violation of international law first in Chechnya, then in Georgia and Crimea. All while in the Western world the election of Donald Trump and Brexit showed disaffection towards an economic and social model perceived as unfair and without protection. Pandemic and war have accelerated these trends, bringing the role of government in the economy back to the fore.

Ukraine in NATO

The brutal invasion of Ukraine is not, Draghi stresses, an unpredictable act of madness, but a new premeditated step in Putin’s delusional strategy to restore Russia’s imperial past. For this reason, according to the former prime minister, there is no alternative for the United States, Europe and its allies but to ensure that Ukraine wins this war. Draghi believes that the EU must welcome Ukraine and the Balkan countries within it and that we must be ready to start a journey with Ukraine that will lead to its accession to NATO.

The new inflation

That said, in the new world we will have to live with a certain amount of inflation, warns the former ECB president: The war has contributed to the increase in inflationary pressures in the short term, but it is also likely to trigger lasting changes that herald an increase in the inflation in the future. In retrospect, Draghi admits that central banks should have diagnosed in advance the return of persistent inflation, but they have largely made up for lost time. However, inflation is proving to be more resilient than initially assumed. And so the fight against rising prices will likely require a cautious continuation of monetary tightening, both through even higher interest rates and lengthening the time before their course can be reversed, warns Dragh

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Profits and wages

Inflation has different causes between the United States, where it is driven by demand, and Europe, where the high energy price prevails. In the old continent, Draghi explains, we are witnessing a struggle between companies and workers over who should bear the cost of inflation. Businesses, for now, have put it on the shoulders of consumers, maintaining or even increasing their profits. As a result, real wages have lost purchasing power and, at the end of 2022, were still around 4% below pre-pandemic levels

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The future

dWhile we are convinced that central banks will eventually bring the inflation rate back to their targets, yet the economy will look very different from what we are used to. International tensions will continue to weigh on the growth rate and the reshoring process to bring back strategic productions and reallocate supplies to reliable countries could lead to a higher level of inflation than in the past. Furthermore, I expect governments to manage permanently higher budget deficits to meet new challenges, from the climate to defence, without weakening the social protection that makes the EU unique. And even this will not help the drop in prices.

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