By default (or, rather, a series of near defaults), the
president of the European Central Bank is fast becoming the
most powerful person in Europe. Mario Draghi, who relieves
Jean-Claude Trichet at the ECB as the euro zones top
banker in November, proved at Italys central bank and
Treasury that he has two qualities essential to running a
central bank with one currency and 17 countries, five or more
of them problem debtors: flexibility and temerity.
In August, Trichet and Draghi, acting as Italys
central bank chief, sent Italian Prime Minister Silvio
Berlusconi a letter stating that the ECB would help Rome by
buying stressed Italian sovereign bonds exhibiting
flexibility, while reversing a dangerous spike in bond yields.
At the same time, Draghi displayed temerity by endorsing the
ECBs demand that Italy meet stringent fiscal conditions
that included balancing its budget a year ahead of schedule.
Even cheekier, the joint missive proposed that Italy privatize
utilities and cut public sector wages and pensions.
Had Draghi and Trichet dithered, the euro zone might have
suffered a recession-inducing crisis of confidence.
Unfortunately, euro crises appear with the regularity of the
Paris-Berlin shuttle. In mid-August markets were rattled by
fresh worries that Italy, Spain and even France might not be
able to fund their debt. French President Nicolas Sarkozy and
German Chancellor Angela Merkel called for closer European
economic coordination and, more controversially, for European
states to enshrine a golden rule mandating balanced
budgets in their constitutions. They stopped short of
advocating the one measure some see as critical to resolving
Europes debt crisis: raising money to cover struggling
countries arrears by issuing bonds backed collectively by
currency union members. These supranational bonds (confusingly
referred to as Eurobonds) would benefit disproportionately from
the good credit of Germany and France and would portend closer
European economic integration. Merkel, however, said that
making the euro zone more stable was a hard and arduous
path which we will not be able to avoid by means of some magic
bullet, like issuing Eurobonds.
Draghi, on the other hand, had hinted even before this
summers crisis that he might support such supranational
initiatives, when he noted that the aggregate
fiscal position of the euro zone is actually sounder than
in other parts of the world. He has also made it clear
that as ECB boss he wouldnt be averse to giving
assistance to countries like Greece, Ireland, Spain and
Portugal, as well as Italy, but that he expects troubled states
to sacrifice to dig themselves out of their fiscal holes.