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.
To hammer this point home, the 63-year-old Draghi, who got
his Ph.D. from the Massachusetts Institute of Technology, likes
to observe that in the early 1990s, Italy recovered from a
fiscal mire solely through its own efforts not through
any European Unionwide rescue. Who was behind this
accomplishment? Mario Draghi, then director general of the
Italian Treasury, who earned the nickname Super
Mario, after the Nintendo game hero.
More than 300 million Europeans now have good cause to
wonder whether Super Mario can save the euro. Jennifer McKeown,
European economist at Londons Capital Economics, notes
that austerity in public finance is going to be a really
hot topic for a long time yet, so the more experience the new
president has in that regard, the better.
For now Europes debt crisis is Trichets
headache. But once the danger subsides, what should we expect
from Draghi in carrying out the ECBs primary mission,
which is, after all, controlling inflation? Back in May he
implied that his talons were even sharper than the
Frenchmans. Overheating is a clear and present
danger, declared Draghi, sounding more like an FBI agent
than a central banker. He warned that there was a greater
need to proceed with monetary policy normalization to
stop high inflation in developing countries from emigrating to
Europe. At 2.5 percent, euro zone inflation is well above the
ECBs acceptable level of 2 percent, despite Europes
Yet, Draghi, in contrast to his more hawkish competitor for
the ECB job, exBundesbank president Axel Weber, has
repeatedly shown himself to be adaptable. At the moment,
EU monetary policy isnt about being hawkish or
dovish, says UBS global economist Paul Donovan.
Its about managing an extremely disturbed financial
system, in which case technical competence is probably the most
important thing. In that, Draghi will be very, very helpful in
terms of managing the process. David Turner