"One needs to be at peace with one's conscience. If you are convinced something ought to be done, it must be done."
There is one reality for bankers, another for the rest of us. That is the lesson most easily drawn from the Jan. 10 press conference of the European Central Bank (ECB). Just hours earlier, Greece had released its latest labor statistics: a steep overall jobless rate of 26.8% masking even worse news for young Greeks, with over half of them — an astonishing 56.6% — out of work. The human toll of the country’s struggle to avoid a ragged departure from the European single currency could scarcely be starker. In 2012 the 17-nation euro zone lost more than 2 million jobs as it grappled with its fierce debt crisis.
Yet the mood at the ECB, and especially of its president Mario Draghi, appeared chipper, at least by the sobersided standards of the institution and the office holder. “We spoke a lot about contagion when things go poorly, but I believe there is a positive contagion when things go well,” he said. “And I think that’s also what is in play now. There is a positive contagion.”
Superimpose Draghi’s optimistic picture on the harsh experiences of Greece and Spain, where unemployment is also hovering around 25%, and you get something akin to a drawing by Dutch graphic artist M.C. Escher: a mind-bending construct with stairs that lead nowhere and architecture ignoring the laws of physics and common sense. That is a pretty accurate portrait of the euro zone and the wider E.U. How you see it depends on your viewing angle, but from no perspective does it make complete sense. Small wonder that increasing numbers of people, especially in debt-blighted European countries, are coming to believe the only solution is to raze the crazy structures and start afresh.
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But that won’t happen if Draghi has anything to do with it. Last year the 65-year-old Italian economist found himself — to the slow-dawning appreciation of governments and bankers from Beijing to Washington — the most prominent and powerful defender of European integration. “Super Mario” saved the euro, literally, at least in the short term. His heroics won him plaudits, but his fellow delegates among the world’s financial elite, gathering from Jan. 22 at the World Economic Forum in Davos, Switzerland, will clamor to know how he believes the currency can overcome the huge existential challenges it still faces.
To understand how pivotal this question is — and by no means just in Europe — it’s worth remembering the size of the euro zone, often overlooked amid excitement at the bulging muscle of China and India and concern over the health of world’s biggest economy, the U.S. The 17 members of the single currency make up the planet’s second largest economy, with a combined annual economic output of $12 trillion. The global recovery, weak and patchy, cannot progress if the euro zone falters and fails. If just one member were to plummet out of the system, markets would exact retribution on people and institutions in distant countries that until that moment had no idea their fates were linked to a continent that has sparked more global conflagrations than any other.
“The European project is a project of peace. Let’s not forget that at the beginning that was the main purpose that our founding fathers had,” says Draghi. His 35th-floor office in the ECB headquarters looks out over Frankfurt, a city nearly destroyed by European conflict and now resurgent as the euro zone’s financial hub. Europe’s is a history of wars, hot and cold, and those experiences inspired the European project toward union and integration. Draghi, born just two years after World War II into a fractured country that had been on the losing side, like many Europeans instinctively grasps that the hardships caused by rocketing unemployment and rampant inflation can imperil even deep-rooted democracies. Sure enough, in Greece, the cradle of democracy — albeit one at times rocked by invaders and in 1967 hijacked by its own military — the despair and rage of its jobless are speeding the rise of the populist far right. Ironically, the phenomenon is stoked by the very budget-cutting reforms demanded by the ECB and the country’s other creditors. As Draghi helps spearhead Europe’s struggle to quell the debt crisis, there are troubling issues to address about the failures of politics that have left so many voters alienated and a central banker wielding a greater global influence than most elected leaders.
Last year, when those failures came close to ripping apart the euro, Draghi stepped into the breach. Just 20 words from him were enough to simultaneously shock and soothe the markets threatening the currency’s destruction. “The ECB is ready to do whatever it takes to preserve the euro,” he told delegates at a London investors’ conference. “And believe me, it will be enough.”
His dramatic intervention, on July 26, bought time, but that commodity is again running low. Even Germany, the euro zone’s biggest and most robust economy, is sputtering, with growth of only 0.7% in 2012. Draghi’s influence, and all the tools of the ECB, may not be enough to steer Europe’s single currency out of danger if politicians squander the temporary stay of execution he has given them.
Words Are Cheap He describes himself as European first, Italian second, but alarms sounded in Germany in November 2011 when Draghi succeeded the cautious, conservative Frenchman Jean-Claude Trichet as the ECB’s top dog. The ECB’s governing council includes representatives from each central bank of the euro-zone nations. Successive Bundesbank governors, haunted by the specter of hyperinflation that sank the Weimar Republic, have remained wedded to a narrow interpretation of the ECB’s remit, to ensure price stability in Europe. Their angst finds echoes among German taxpayers, resentful that they are being asked to fund what they see as the profligacies of southern Europeans. “Mamma mia!” the German daily tabloid Bild protested when Draghi emerged as a front runner for the ECB job. “With Italians, inflation is a part of life, just like tomato sauce goes with pasta.”
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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.
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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.
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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.
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The resulting turbulence will have a nasty taint of familiarity for Europeans of a certain age, the ECB chief among them. Draghi grew up with a ringside seat to the chaos of postwar Europe. The son of a commercial banker, Draghi says “there was an economic ingredient in all of the discussions we were having [at home].” After his parents died while he was still a teenager, inflation shrank his inheritance.
Like Europe, Draghi recovered from that low point. Luca Cordero di Montezemolo, now chairman of sports-car maker Ferrari, remembers his then classmate at Rome’s Istituto Massimiliano Massimo, a Jesuit school, as “very calm, very well dressed, always polite — his hair was always perfect.” Having already acquired the demeanor of a central banker, Draghi set about polishing the credentials that put him in good stead to be one, completing his doctoral studies in economics at the Massachusetts Institute of Technology in the 1970s, around the same time Fed chairman Ben Bernanke was also studying there. “The U.S. was a much bigger and exciting place to be at that time [than Europe],” says Draghi.
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He would later return to the U.S. as an executive director at the World Bank. He has an “international mentality” uncommon among his compatriots, according to Montezemolo, who adds, “The main problem today with the leading class in Italy is that there are few people who can be comfortable if they go to Washington, to Brussels, to Beijing, to São Paulo.”
That international mentality has done nothing to mitigate Draghi’s devotion to the single currency, which he helped forge, first as director general of the Italian Treasury — where he led the Italian delegation to the 1991 conference that produced the Maastricht Treaty, in turn laying the groundwork for the formation of the euro — and from 2006 to 2011 as governor of the Bank of Italy. When the euro teetered at the edge of the abyss, there may never have been any real likelihood of Draghi’s allowing himself to be confined by historical interpretations of the ECB remit to standing back and letting events take their course. “One needs to be at peace with one’s conscience,” he says. “If you are convinced something ought to be done, it must be done.”
With the same calm certitude, Draghi is now pushing for a more durable solution to Europe’s problems. Despite the limitations of his job, and unlikely though it may seem that our banker-bashing era should find in a top banker an avatar of credibility, Draghi appears to be in a better position than most national leaders to communicate — and be believed. And he leads a bank that operates independently and has the ability to print money. It is “the only properly functioning common European institution,” according to Johannes Müller, chief economist at DWS Investments in Frankfurt.
Situations Vacant One problem with democracy is that it often rewards good, honest politics with bad election results. Even as euro-zone leaders inch toward integration, they risk being turfed out of office. Italian Prime Minister Mario Monti, installed rather than elected in 2011 and thus free from the pressures of party politics, managed to stabilize his country’s shaky economy; he now trails the front runners in national elections scheduled to take place next month. Merkel, in contrast to many of her euro-zone counterparts riding high in opinion polls, seems likely to be re-elected when Germany votes later this year, but her business-friendly coalition partners face being tipped out of government. Political turbulence across the euro zone threatens new market turbulence, which could force Draghi to intervene again and again. Yet that’s all he can do. “[Draghi] needs to continue to stress that while the ECB can buy time for the euro zone, the institution cannot by itself deliver a sustainable solution,” says Mohamed El-Erian, CEO of fund-management giant PIMCO. “ECB intervention is a bridge, not a destination.”
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Some critics believe Draghi still could and should do more, for example, by buying government bonds in large quantities to bring down borrowing costs. The ECB “has to do everything to stabilize the markets,” says Peter Bofinger, a member of the German government’s Council of Economic Experts. “Most politicians have reached the limits of their room to maneuver. The only actor who can do something is the ECB. There is nobody left.”
Others complain that Draghi has already done too much. They say that by easing the pressure imposed on politicians by unsettled markets, Draghi has allowed them to backslide. Jens Weidmann, the Bundesbank’s president and representative on the ECB’s governing board, objected vociferously after Draghi’s “whatever it takes” pledge, telling the German newsmagazine Der Spiegel, “We should not underestimate the risk of central-bank financing becoming addictive like a drug.”
Draghi has nimbly outmaneuvered Weidmann. When the ECB council debated the scheme, the German’s was the sole dissenting vote. Draghi is skillful at building consensus and isolating opponents. In the words of a former official in the French government who collaborated closely with Draghi, he “works around opposition rather than confronting through collision.”
These skills and the passionate Europeanism that Draghi’s cool manner belies have catapulted him to a position of unexpected visibility. “Politicians appreciate recognition. I do not,” he says. “But it comes with the job, especially at this point in time, when the job becomes so crucial.” His powers are expanding too. In December, euro-zone countries agreed to form a common regulatory system for major banks — to be managed by the ECB. Integration, says Draghi, “is moving forward after many years when there was basically no progress at all.” Optimism is easier to believe when it comes from a man who has done so much to justify it; you could call it positive contagion. But until Europe’s politicians step up, not even Super Mario can guarantee a safe landing for the euro.
— with reporting by Bruce Crumley / Paris And Stephan Faris / Rome
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