How the economic fate of Europe, and the world, came to rest on the shoulders of an inconspicuous Italian banker.
- By Cameron AbadiCameron Abadi is deputy editor at Foreign Policy. He previously worked at the New Republic and Foreign Affairs and as a correspondent in Germany and Iran. His writing has appeared in Bloomberg Businessweek, the New Yorker, the New Republic, and Der Spiegel.
The most fervent discussions of the European leaders gathered in Brussels on Friday, June 24, focused on riots in Athens, unruly parliamentarians in Berlin, disaffected youth in Madrid, and, perhaps, sexual crimes and misdemeanors in Rome. But they also found some time to ratify their choice for the next tenant of a modest office space in downtown Frankfurt, Germany. As expected, Mario Draghi, an Italian economist with a number of nicely tailored suits, but little evident charisma, received unanimous support to follow Jean-Claude Trichet in becoming the next president of the European Central Bank (ECB).
It’s a less-than-pressing issue for most Europeans, to say the least. As long as countries are considering selling off their airports to make ends meet, the obscure, technical art of monetary policy is likely to escape popular notice. But austerity and riots and bunga-bunga parties notwithstanding, Draghi’s appointment may be more important than anything else that’s likely to happen in Europe this year.
Not that Draghi would give you any way of knowing. In typical fashion, Draghi not only failed to hold a news conference on Friday, he wasn’t even in attendance in Brussels as the announcement of his appointment was made. Even when people try to praise him effusively, they end up underscoring this essential boringness. “Mario was never uncombed; he was always tidy,” one former classmate from the rigorous Jesuit schools where Draghi was educated told Bloomberg. “Mario has always been very serious.”
As one German newspaper put it, the no-nonsense Draghi is the “anti-Berlusconi,” the polar opposite of the spotlight-seeking Italian prime minister. Indeed, compared with Draghi, even Trichet comes across as an unremitting dandy. The Frenchman was famous for indulging in extended recitations of poetry, as well as grandiose analogies between economic affairs and the worlds of arts and culture (as one journalist wrote of Trichet, “he could easily have ended up in a university declaiming the verses of Homer rather than at the helm of a monetary institution.”) Draghi, meanwhile, rarely gives interviews, has no entourage, and famously carries his own bags when he goes on trips.
But Draghi will, in fact, soon wield more influence than any of the prime ministers who ratified his appointment. Brussels, as the capital of the European Union, still hosts the continent’s symbolic grandeur, but it’s sleepy Frankfurt — a banker’s town, a city of early nights and breakfast meetings — that is now the de facto seat of European power. There’s plenty of pathos invested in the question of whether Europe will survive its current travails, but it’s obvious by now that the European Union doesn’t have the reserves of fellow feeling, or the institutional mechanisms, to channel that urgency to much productive end. Indeed, the European Union has been striving toward “an ever closer union,” a refrain from one of its founding documents, but European countries have been careful to preserve as much sovereignty as possible: institutionally, the countries of Europe aren’t engaged in a bear hug so much as a skeptical handshake.
The ECB is among the few exceptions. Unlike the other forums through which Europe conducts its common affairs, the ECB is not a mere debating club, an opportunity to reach consensus — it’s an actual institution, a body with a mandate to protect the euro and the power to carry it out, even in the face of resistance. There are few equivalents elsewhere in the European Union of the ECB’s unilateral authority to alter interest rates on the euro. The European Parliament can initiate legislation only to watch it choked off at any number of veto points; the EU foreign-affairs chief Catherine Ashton can chart a bold rhetorical course in international affairs, but she’s required to follow up with exactly the sort of painstaking consensus-building among member states that her position was intended to minimize; Herman Van Rompuy himself might be hard-pressed to describe what his role as president of the European Council consists of.
And, as has often been lamented this year, there is no EU treasury department that can prepare a soft landing for the continent at times of economic crisis. Europeans have instead witnessed the unedifying spectacle of Germany’s Angela Merkel and France’s Nicolas Sarkozy performing ad hoc fiscal policy on behalf of the continent, trading historical analogies and sketching bailout scenarios — thinking out loud, essentially. They have, predictably, not made nearly as much progress as Europe has needed.
So while the leaders of the European Union take pains to pay deference to principles of democracy, at a time of crisis it’s a small group of unelected central bankers inevitably making momentous decisions on behalf of the continent. Under Trichet’s leadership, the ECB has offered authority elsewhere lacking in the continent, if in the dry, technical, number-crunching form that is its métier. The currency of the bank’s power, after all, is currency.
That is not to downplay the revolution that the ECB has undergone in the past several years. Although its mandate is narrowly focused on fighting inflation, the credit crunch and subsequent debt turmoil have forced it to serve as a freelance troubleshooter for all systemic threats to Europe’s financial system. While Europe’s political leaders were still having trouble reckoning with the extent of economic danger a year ago, Trichet saw clearly that default by a single country, or a single major bank, might trigger a cascade of bankruptcies and panic à la the 2008 Lehman Brothers collapse. Europe, Trichet told Spiegel magazine at the time, was “in its most difficult situation since World War II or perhaps even since World War I.”
His response was to essentially open the bank’s coffers in unprecedented fashion. Beginning in May 2010, the ECB drastically eased lending to banks across Europe, began buying tens of billions of euros of bonds from stressed countries, and cut interest rates to as low as 1 percent to keep credit flowing. The ECB, once tasked with the modest task of keep price levels steady across the continent, is now providing life support to vast sections of Europe’s economy.
Draghi is unlikely to change course. Not only is he no stranger to this radical transformation of the ECB, but he was on the bank’s governing council as all these decisions were being made. Indeed, Draghi comes to the job with a sterling résumé for the kind of crisis management he’ll be expected to perform. Like his fellow central bankers Ben Bernanke in Washington and Stanley Fischer in Israel, he earned his doctorate in economics from the Massachusetts Institute of Technology. He has worked as an executive at both the World Bank and Goldman Sachs, and he is currently head of the Financial Stability Board, an international body that was tasked by the G-20 with reforming global banking rules. He also served as a chief economist of Italy’s Treasury Department in the early 1990s. (In expressing confidence that Greece can be pulled back from the brink of total bankruptcy, he’s no doubt drawing on his experience presiding over a similar situation in Italy during that time.)
His economic chops might not be in question, but it’s Draghi’s diplomatic skills that will be put to the test as soon as he assumes the presidency of the bank. The eurozone countries will be quick to remind him of their various national interests, and national prejudices. He will have his work cut out for him with the German public — the people of perhaps the world’s only country that has made hard money a constituent part of its national identity. “Mama Mia! An Italian, of all things!” sneered the front page of the tabloid Bild when Draghi’s candidacy became public earlier this year. “For Italians, inflation is a way of life, like tomato sauce with pasta!” (More recently, Bild has come around. An April article about Draghi shows him depicted in a Prussian spiked helmet, underneath the headline: “This is how German the new ECB chief is!”)
Cultural questions aside, Draghi will soon find that the ECB is at loggerheads with national governments on the question of how best to navigate the euro through the crisis. Some governments are arguing that the ECB’s interest rates are too low; others are arguing they are too high. While some countries, such as Spain, are struggling with massive unemployment, others, like Germany and Finland, are already fearing inflation and overheated economies. And no matter what Draghi decides to do, EU bureaucrats are going to be casting a skeptical eye on the expansive and extraordinary powers he has inherited.
Some in Europe are already murmuring about a worst-case scenario for the ECB. By making such huge bets on the bonds of Greece — 45 billion euros and counting — and other heavily indebted countries like Portugal and Spain, the ECB now itself has a huge stake in those countries’ staying solvent. Even if Greece moves toward some sort of orderly default, as Germany has proposed, Draghi may see the value of his bank’s massive investments precipitously decline. The ECB would then itself become a bad bank writ large, one that will need a bailout from its constituent member states. Indeed, it’s not entirely clear what the bank’s endgame was, aside from optimism, when it made its bet on Greek sovereign debt.
What’s clear is that, one way or another, the ECB will continue to be at the center of the unfolding crisis. Draghi passed only fleetingly through the spotlight on Friday when he was tapped in Brussels, but if he thinks he’ll be able to escape to anonymity in Frankfurt, he’s wrong. The ECB balance sheets will hide him for only so long. Being boring is a luxury that Draghi no longer has.