The spotlight in the European debt crisis has now shifted decisively toward the influential leader of the European Central Bank, Mario Draghi, who emerged from the recent summit meeting in Brussels with new powers and stronger backing to address the Continent’s financial woes.
Political leaders took significant strides toward making the central bank more like the United States Federal Reserve, giving it authority to oversee the Euro zone’s largest banks and, once that new regulator is in place as soon as the end of this year, a likely role in rescuing Spanish banks with capital directly from the European rescue funds.
Many of the longer-run plans under discussion, like European deposit insurance, would mean shifting further responsibilities toward the bank, arguably giving Draghi the most influential executive powers in Europe.
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“In terms of unelected people, he is by far the most powerful in the democratic world,” said Franklin Allen, a professor of finance and economics at the University of Pennsylvania’s Wharton School. “He’s going to have huge influence over bank supervision and over the purchase of sovereign debt, whether he’s the head of the committees in charge or not.”
On Thursday, the central bank’s policy meeting will serve as kind of a second act to the summit meeting, with its council probably offering a rate cut as a tacit reward to leaders for the progress they made, as well as a chance for Draghi to sketch out his version of a stronger Europe. He is the one actor in a fragmented Continent who can move swiftly and resolutely, as he did in dispensing nearly $1.3 trillion in cheap loans to banks and briefly stilling market unrest.
But his determination to remake the currency union for long-term stability has made him equally willing to withstand pressure in the past.
He has the power to withhold cuts in interest rates, resist pressure to inject more money into the European monetary system, and hold off on purchases of sovereign debt from struggling countries if he determines that political leaders are not doing what is necessary to fix their economies.
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“He is calm in the face of the storm,” said the United States Treasury secretary, Timothy F Geithner, who has known Draghi for more than a decade, “and he sees the world as it is, not how we’d like it to be.”
It remains to be seen how the missing details from the summit meeting could undermine his discretion, how much power he would have over the bailout funds, for instance, or how an ECB banking authority would relate to national bank regulators. Draghi’s new powers also do not address what many analysts see as the biggest structural question facing the Euro zone: how to reduce the heavy debts of many of the region’s economies at a time of severe economic weakness.
One thing is certain: The financial and monetary integration in Europe continues to outpace the deepening of political and fiscal ties, risking an angry reaction from German taxpayers who could find themselves on the hook for more and more liabilities. A German constitutional court is wary of allowing too much latitude to Draghi and other European officials, threatening to strike down steps that violate Germany’s Basic Law.
But for now, Draghi’s already significant influence seems only to have grown. One official who works closely with Draghi said he still enjoyed the support of Germany’s chancellor, Angela Merkel, who understood well his carrot-and-stick method.
Analysts expect the bank to cut its main interest rate to 0.75 per cent on Thursday from 1 per cent, the lowest ever, in a further attempt to unblock credit. As evidenced by his decision at the beginning of June to leave interest rates unchanged, despite signs that Spain was sliding toward the abyss, they, and Euro-zone leaders, would be well advised not to underestimate his nerve.
His stance was widely perceived as a warning to political leaders that he was willing to play hardball to get them to adopt the policies he wanted. Draghi’s years of working in the Italian Treasury as it struggled to reduce deficits in order to meet the criteria to join the euro have taught him that politically unpopular changes are never accomplished without pressure.
Policy makers and analysts alike insist that behind the pressure tactics is a man who is prepared to do whatever it takes to save the common currency and with it the central bank he leads.
“He has the most essential insight of a central banker that you need in a crisis — the recognition that there are some things only central banks can do, and if they don’t do them then nothing is possible,” Geithner said.
His nickname, Super Mario, does not seem to fit him. Draghi, 64, has no obvious flash or flair; an economist in a dark suit and glasses, he has just enough of a knowing smirk, a gentle irony, to avoid seeming dull, more monetary Machiavelli than video-game hero.
When Draghi took over as the European Central Bank’s president in November, he immediately changed the conduct of the monetary policy meetings held high in the bank’s skyscraper headquarters in Frankfurt.
His predecessor, Jean-Claude Trichet, started each gathering by stating his own views before inviting agreement and dissent from the other 22 members of the council, most of them heads of national central banks from tiny Malta to mighty Germany. Draghi, several participants said, first solicits opinions from around the doughnut-shaped conference table, only at the very end announcing where he stands.
In some ways he has been preparing for this moment for his entire life. Draghi’s father, who died when Mario was 15, once worked at the Bank of Italy. Before a long career as a banker, the elder Draghi worked for a government agency under Mussolini that had been founded to restructure financial institutions and other companies in trouble because of the Great Depression.
As director general of the Italian Treasury, Mario Draghi, the steady hand just below a revolving cast of political appointees, was in charge of selling off the Italian phone company and other state assets in the 1990s. He had a knack for locating the sweet spot where the interests of the Italian government and investors coincided.
“Mario has incredibly finely tuned antennas when it comes to speaking to different people,” said Philipp M Hildebrand, former president of the Swiss National Bank, who represented an investment company during the privatisation drive and later sat on a panel led by Draghi that negotiated international banking rules. When talks were at an impasse, Hildebrand said, “I remember sitting around the table thinking, ‘I have no idea how to find a solution.’ He managed.”
The sweet spot Draghi must negotiate now is between the monetary hawks, especially in Germany, who say he has abused his power by going far beyond his inflation-fighting mandate, and the soft-money doves who say his failure is not going far enough to rescue the euro.
Draghi in turn has urged politicians to do more, dismayed by the way they eased up on their reform drives once the flood of cheap loans to banks calmed markets for a few months. The lesson was that big injections of cash from the European Central Bank produce little more than a sugar high unless they are accompanied by fundamental reforms to the currency union’s architecture, changes that would convince investors that the euro zone is built for the long haul.
“Mario Draghi is going to be damned if he does and damned if he doesn’t. Damned if he does because he’ll be seen in Germany as caving in to irresponsible and profligate countries in the periphery,” said Philip Whyte, a senior research fellow at the Center for European Reform in London. “If he doesn’t cave in, it’s difficult to see how Greece can stay inside the Euro zone.”
Nicholas Kulish reported from Berlin, and Jack Ewing from Frankfurt. Elisabetta Povoledo contributed reporting from Rome.
© 2012 The New York Times News Service