The
house that Mario built
The
ECB president saved the euro. Now the Italian wants to save Europe.
By PIERRE BRIANÇON
12/10/15, 5:30 AM CET
FRANKFURT — The
40-story twin towers that house the European Central Bank are set
apart from Frankfurt’s business center, projecting power, mystery
and distance. “If we designed it today we might prefer modesty, and
something more unassuming,” said a close associate of its
president, Mario Draghi, whose office is on the top floor.
The grandeur of its
headquarters is now, in ways that Draghi’s aide seems to find
discomfiting, appropriate to the institution that the 68-year-old
Italian banker has built. Once modestly conceived to keep inflation
in check, the bank is now controversial, and in Germany even
downright unpopular. Draghi and his close associates know they have
to plead, explain, lecture virtually every week on behalf of their
chosen remedies.
Halfway through his
eight-year term, Draghi has carved out freedom for himself and the
ECB, turning the bank into arguably Europe’s most powerful
institution. He’s done so by spurning consensus on the bank’s
board and winning, mostly, the tacit support of German Chancellor
Angela Merkel, Europe’s most powerful leader.
Without that
support, Draghi could not have taken the bold steps that enabled him
to save the euro. Now that the danger of a disintegration of the
eurozone has abated, the ECB president is embarking on an even
tougher political task: to convince Europe’s governments that they
must do their part of the heavy lifting to take the continent out of
the slump.
The eurozone’s
main challenge is now to address the growing political risk, says a
member of the ECB’s six-strong executive board. The deep
euro-fatigue across the bloc brought on by low growth, and its
political consequences as seen in a spate of recent election triumphs
for extremist parties, is seen here as the main threat to the euro’s
existence.
“German
Chancellor Angela Merkel “has an analytical mind, so does he, so
they understand each other.”
Draghi doubled down
last week on his commitment to keep interest rates low and boost
inflation, with a major extension of the bank’s quantitative easing
program. He is prodding EU governments to boost spending to put the
European recovery back on a path to growth. Summing up the challenge,
the ECB executive board member and chief economist Peter Praët noted
that “the eurozone GDP in the first quarter of 2016 will be roughly
what it was in the first quarter of 2008.”
The more Draghi
pushes, the more tensions are likely to show within the ECB. “So
many things depend on the central bank now in Europe that the real
danger could be a real split within the (ECB) governing council,”
said Frédéric Ducrozet, senior economist at Swiss private bank
Pictet and a longtime ECB-watcher.
The Fed, not Buba
The aloof, somewhat
academic Italian has proven the skeptics wrong repeatedly since his
arrival in Frankfurt. He overcame initial doubts about the wisdom of
appointing an Italian — someone from one of Europe’s most
indebted countries — to head the eurozone’s central bank. And he
has been a master at circumventing the persistent opposition of the
Bundesbank to his decisions.
“One of Draghi’s
major achievements is his mastery of central bank diplomacy,” said
Daniel Gros, director of the Center for European Policy Studies in
Brussels. “It’s even more amazing considering his passport.…
But he has carried the German political establishment every step of
the way.”
That does not
include the German central bankers: Executive board member Sabine
Lautenschläger, a former Bundesbank executive, “has a clear and
consistent line, she always says no,” said one of her colleagues.
She shares the 39th floor of the ECB tower with fellow hawk Yves
Mersch of Luxembourg. The “doves” of the executive board,
France’s Benoît Coeuré and Belgium’s Peter Praet, sit on the
38th.
And 15 minutes’
drive away at the headquarters of the Bundesbank, German central bank
chief Jens Weidmann sometimes greets visitors by reminding them that
he’s “not a great fan of Mario Draghi,” like he recently did
with a group of them.
Yet one of Draghi’s
greatest accomplishments, in the words of one former ECB governing
council member, is that “he declared the ECB’s independence from
Germany.”
The ECB was modeled
consciously on the Bundesbank (or “Buba”, as the German central
bank is nicknamed): strictly independent from governments, with a
narrow mandate to fight inflation, and forbidden from any type of
“monetary” financing, through which the eurozone central bank
might be tempted to print money to finance profligate members.
“Draghi’s model
is the Fed, not Buba,” said Gilles Moec, chief European economist
at Bank of America Merril Lynch.
Like the Fed, Draghi
made the ECB a place of academic and at times wonkish discussions of
economic problems.
The U.S. Federal
Reserve’s job is to keep prices under control and, unlike the ECB’s
narrower mandate, adopt policies that spur job growth.
The European bank’s
changed culture partly reflects Draghi’s background. Unlike
Jean-Claude Trichet, a long-time civil servant who went on to head
the treasury and became governor of the French central bank in the
years of the euro’s creation, Draghi trained as an academic.
He received his
doctorate in economics from the Massachusetts Institute of Technology
in 1977, and embarked on a teaching career at several Italian
universities before being appointed later, aged 44, director of the
Italian treasury.
“When we’re
around the table, or one-to-one, we talk with each other as
economists,” said Coeuré, a statistician by training who had a
career at the French treasury before joining the central bank. His
colleague Peter Praet previously worked at the IMF and as a bank
economist before becoming executive director of the Belgian central
bank in 2000.
The new influence of
economists on the ECB’s doctrine has been reflected in the
appointments Draghi has made, especially the promotion to chief of
staff of Frank Smets, former head of economic research at the bank,
who is now tasked with preparing the work of the executive board. His
influence is visible in many of Draghi’s speeches, notably when
signaling changes in the central bank’s policy.
Under Trichet, the
ECB never deviated from its strict emphasis on fiscal discipline and
“structural reforms” it once saw as the best way out of the
economic slump. A broader and more nuanced approach now sees Draghi
and his allies ask governments in the eurozone to take urgent action
to remedy weak demand and growth in the eurozone and high
unemployment.
“We first had to
deal with the banks, make sure they could keep lending to the
economy,” said Christian Noyer, governor of the French central bank
for 12 years until he retired last month. “Then more recently we
became concerned about the risk of deflation, and the slow eurozone
recovery, which required new measures.”
“Few
if any of the decisions that the ECB has taken since Draghi took over
have been unanimous.”
To push these new
measures, Draghi is less interested in consensus and accommodating
the Germans than was Trichet, the dour Frenchman from whom he took
the helm of the ECB on November 1, 2011. “Trichet was trying to
lean German and was hoping to be able to make a speech in German,”
Moec said. “I’m not sure Draghi even tries.”
Yet the Italian has
succeeded where Trichet — often seen as more German than the
Germans — failed by creating a personal rapport with Chancellor
Merkel that enabled him to push for ever looser policies despite
Bundesbank opposition. While Weidmann makes his discontent public,
Merkel has never publicly criticized Draghi.
“She has an
analytical mind, so does he, so they understand each other.
Furthermore, she probably knows that Germany’s own economy would be
hurt if Draghi didn’t do what he did to keep the eurozone afloat,”
said the head of one national central bank.
That relationship is
crucial at a time when ECB policy is becoming ever more unpopular
with the Bundesbank and Germany’s ageing population of savers.
Draghi has declared his intention to keep interest rates low for as
long as needed to bring the eurozone’s low inflation rates back to
the ECB’s stated target of “below but close to” an annual 2
percent. Inflation is now at 0.1 percent.
With that target
still elusive, quantitative easing — whereby the bank buys some €60
billion worth of assets on the market every month to keep interest
rates low — has now been expanded for at least six months beyond
its originally-planned term. “The ECB’s role is to design
policies for the whole of the eurozone, not individual countries,”
said Smets.
Benoit Coeuré goes
further, suggesting that the ECB’s current policy is exactly within
the original mandate on which Weidmann and others constantly insist.
“Not doing anything would find the ECB failing at its only, narrow
mandate. It’s a matter of credibility and accountability,” he
says.
Il presidente
Overt opposition to
his looser monetary policy never stopped Draghi. He acknowledged last
week that the decision to expand quantitative easing wasn’t
unanimous, though it was supported by “a large majority” of the
governing council, the ECB’s top decision making body. The two
Germans on the council, Weidmann and Lautenschläger, were among the
opponents.
The truth is that
few if any of the decisions that the ECB has taken since Draghi took
over have been unanimous. He shows little interest in building
consensus. Where Trichet would have sought a degree of unanimity
among the 25 members of the governing council — the six executive
board members and 19 governors of the eurozone’s national central
banks — Draghi decides after many one-on-one conversations with ECB
colleagues, but also economists he knows from Europe or America.
“Trichet was
authoritarian in committee, while making sure everyone around the
table had spoken, and working tirelessly so he could say there was a
consensus,” said another board member. “Draghi is more
presidential. He relies on bilateral conversation, and consults a lot
of people he knows outside the bank.”
At times, this
frustrates some central bank governors. He is known for texting
during meetings, or popping out to take calls in the midst of a
discussion.
“Trichet made a
point to behave as if all central bankers were created equal in the
eurozone,” said a top ECB staffer. “Draghi doesn’t really care
if it shows that he doesn’t think so.”
It was clear just
two days into Draghi’s presidency that a new era had begun at the
ECB. Earlier in 2011, the bank had raised interest rates, a decision
that even Trichet loyalists recognize was a mistake.
Gilles Moec
describes Draghi’s first news conference on November 3 that year as
“a bet on transparency, ‘here are the scenarios, we might do this
or that.’ Trichet’s statements were in coded and cryptic language
that markets were left to decipher.”
By the following
summer, the new president’s gumption was put to the test. He had
only been in the job for nine months, but the euro crisis was already
in its third year, and had forced Greece, Ireland and Portugal to
request multi-billion bailouts from new eurozone rescue funds. Now
Spain, the eurozone’s fourth-largest economy, had been pushed to
the brink by failing banks, and investors were betting the euro
wouldn’t survive.
‘Whatever it
takes’
Speaking to
financiers, investors and policymakers in London on July 26, 2012,
Draghi was explaining what his institution had already done to make
the euro unassailable when he added, as if ad-libbing: “There is
another message I want to tell you. Within [its] mandate, the ECB is
ready to do whatever it takes to preserve the euro.”
Pause.
“And believe me,
it will be enough.”
No one knew exactly
what the ECB president had in mind, nor how much was “enough.”
But the euro rallied and within 24 hours, Merkel and France’s
President François Hollande backed Draghi.
The ECB would soon
announce a plan to buy bonds of troubled governments in exchange for
reform commitments — which never had to be used, because Draghi’s
threat had convinced the markets. Nobel laureate economist Joseph
Stiglitz has called the speech a confidence trick. “It may have
been indeed, but it worked, didn’t it?” responded one eurozone
central banker.
“The
ECB is ready to do whatever it takes to preserve the euro. And
believe me, it will be enough.”
“The conventional
wisdom is that we were worried about markets, which is true, but we
were also concerned about the big corporates hiring lawyers to
redenominate their contracts in euro,” recalled Benoît Coeuré.
The ECB executive council had discussed beforehand the need to send a
strong signal, he said, “and we knew [Draghi’s speech] it was
coming. But he decided the time and wording.”
Two years later,
Draghi prepared markets and European governments for another policy
pivot: The euro was no longer under existential threat and the
eurozone’s biggest banks had come under ECB supervision, but the
economy was still struggling and the threat of deflation loomed.
In speeches in
Amsterdam in April and Jackson Hole in August, Draghi prepared
markets for a renewed emphasis on raising inflation from around zero
to the 2 percent target. Promising improved ECB transparency, he
urged governments to do more to fight unemployment, pledging greater
help from the ECB.
For the moment,
Draghi is happy to let Coeuré and Praet push the message that
Germany in particular needs to splash out more on public
infrastructure, to address what one ECB executive board member called
an “absurd situation” where spending is so subdued that the
fiscal deficit of the eurozone is much lower than the 3 percent
allowed by the Stability and Growth Pact.
The ECB is also
pushing for faster fiscal integration of the eurozone, which some
executive board members link to the creation of a eurozone finance
minister with real powers — and of a full banking union, where the
risk would be shared among member countries if a major bank in the
bloc had to be restructured.
Some of these ideas
are anathema to the Germans. But, as one of Draghi’s supporters in
the French government put it, “the eurozone crisis is the story of
things Germany ‘would never accept’… but eventually did.”
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