New ECB Boss Mario Draghi Knows Crisis Management

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 zone’s top banker in November, proved at Italy’s 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 Italy’s 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 ECB’s 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 Europe’s 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.”

另一方面,德拉吉暗示even before this summer’s 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 wouldn’t 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 Union–wide 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 London’s 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 Europe’s debt crisis is Trichet’s headache. But once the danger subsides, what should we expect from Draghi in carrying out the ECB’s primary mission, which is, after all, controlling inflation? Back in May he implied that his talons were even sharper than the Frenchman’s. “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 ECB’s acceptable level of 2 percent, despite Europe’s sluggish growth.

Yet, Draghi, in contrast to his more hawkish competitor for the ECB job, ex–Bundesbank president Axel Weber, has repeatedly shown himself to be adaptable. “At the moment, EU monetary policy isn’t about being hawkish or dovish,” says UBS global economist Paul Donovan. “It’s 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