The phrase recalls the old wisecrack that heaven is a place where the bankers are German and the cooks are Italian, whereas in hell those roles are reversed. Draghi laughs when reminded of the joke, but the world can be grateful that he’s demonstrated more than a soupçon of creativity along with bankerly prudence. Trichet, intent on warding off the bogeyman of inflation, hiked the bank’s benchmark interest rate even as euro-zone economies flatlined. Just two days after taking office, Draghi demonstrated a new boldness in approach, lowering the rate in an effort to stimulate lending and growth. The following month, he instituted a lending program for euro-zone banks to ease the credit crunch. But although these measures provided welcome relief for European financial markets, this was just tinkering around the edges of the deeper-rooted problem that saw investors betting on a Spanish bailout and forcing Italy to borrow at prohibitive rates. That problem is rooted in politics. Politicians not only failed to tackle it; bickering, fudging and kicking urgent decisions into the long grass, they are the problem, or an integral part of it.
The euro, launched in 1999, was a political as well as an economic initiative, conceived without the institutions and policies to properly govern it. Governments retained the individual authority to spend and borrow even though they all used the same currency. Over time, as more countries joined, monetary union strained to contain economies of widely varying levels of competitiveness, from solid Germany to tumultuous Greece, and their uncoordinated economic policies made them diverge even further. Without built-in exit mechanisms, any breakup threatens to be traumatic. There is broad agreement that greater integration offers the only possibility for happy cohabitation. There is little agreement on the timing, costs and conditions involved in getting to this blessed state.
Last year, in the absence of progress, the markets threatened to blow a set of doors into the construct. The euro zone had begun to slide into its second recession since the U.S. subprime crisis. Markets were understandably skeptical about the political will among creditor countries to keep the rickety euro afloat as Germany, the biggest creditor, vacillated over the way forward, with rifts opening up in its governing coalition and within Chancellor Angela Merkel’s own party, amid challenges to the legality of its bailout undertakings and eroding public support for the whole enterprise. Nor was dynamic political leadership on offer from other quarters.
Draghi waited and watched, concerned to avoid any action that might deter the euro zone’s weakest members from overhauling the systems and structures that got them into unsustainable debt in the first place. But by midyear, yields on the bonds issued by cash-strapped euro-zone governments — the interest rates they have to pay to attract investors — were climbing steeply on fears that the countries might default. Spain’s spiked above 7%, the threshold at which Greece, Ireland and Portugal had been forced to give up borrowing on the markets, instead taking bailouts from the International Monetary Fund and the E.U. “The perception was that the rest of the world was having doubts about the continuing existence of the euro,” says Draghi.
As vultures circled, he saw no option but to issue his resonant “whatever it takes” pledge, an undertaking that went far beyond anything offered by his predecessors. “The tone came out strong,” he says, “and the tone came out to produce in the market the consequence that one would want.” That consequence — breathing space — didn’t cost a euro, not even after Draghi fleshed out the details in September, unveiling a scheme to buy an unlimited number of certain types of bonds from struggling countries, provided they sign up for a stringent reform program agreed on by the E.U. No country has yet availed itself of this.
Sovereign-bond yields have continued to recede and remain at tolerable levels; an auction on the morning of the ECB’s Jan. 10 press conference saw yields on Spain’s benchmark 10-year bonds falling below 5%. The ECB “has become a more active part of the solution” to the crisis, says Michael Schubert, Commerzbank’s ECB watcher in Frankfurt. “Draghi is a very important part of that new direction.” In the absence of clarion leadership from other quarters, Europe’s central banker has taken the wheel.
War and Peace On Jan. 10 a flash mob of musicians and singers, organized by Spanish radio show Carne Cruda 2.0, invaded a job center, performing the Beatles’ optimistic anthem “Here Comes the Sun” to people queuing for the scant work available. Manifestations of swelling discontent at the price of staying in the euro often prove less benign, with demonstrations across austerity-hit countries in some cases turning into riots. Opinion polls even in Europe’s best-performing economies show declining faith in the E.U. and the euro. Populist parties playing on these sentiments, often linking them to nationalist, anti-immigrant messages, have witnessed upticks in support in many corners of the continent.
Mainstream politicians appear as apt to borrow from populists as to challenge their views, and with faith in the political classes also at rock bottom in most countries, selling the idea that what is needed is more Europe, not less, is far from easy.
Closer European cooperation has certainly delivered some economic benefits, as Draghi is quick to point out. “The very significant growth that Europe had in the 1950s and 1960s was actually caused by the beginning of the European effort. Europe brought prosperity, wealth, jobs,” he says. It’s harder to make the same argument for the first decade of the 21st century as the debt crisis reveals some of the prosperity as a sham and jobs melt away.