Mario Draghi knows he can’t afford to repeat Jean-Claude Trichet’s mistake.
A month into his term as European Central Bank president, Draghi is being careful not to alienate Bundesbank chief Jens Weidmann, a vocal opponent of the ECB’s bond purchases. As Europe’s sovereign debt turmoil enters what could be its decisive days, Draghi needs to keep Germany’s central banker onside for any expansion of the ECB’s crisis-fighting role, say economists from Barclays Capital to Societe Generale SA.
“Draghi is likely to be very conscious and aware of the Bundesbank’s perspective,” said Julian Callow, chief European economist at Barclays in London. “It’s going to be a hard act for Draghi to balance strong views for dramatic action and calls from Weidmann for a more cautious approach.”
Draghi, 64, may need all the diplomatic nous he’s accrued in a career that began under the tutelage of Stanley Fischer at the Massachusetts Institute of Technology and has taken him to Italy’s finance ministry, the boardrooms of Goldman Sachs Group Inc. and now the 35th floor of the ECB’s Frankfurt headquarters. As he pushes governments toward fiscal union to secure a lasting solution to the debt crisis, Draghi has signaled greater central bank intervention could be the quid pro quo.
“If the ECB sees governments are moving in this direction, and this is not enough to restore market confidence in the short term, more ECB action to provide confidence will probably come,” said Marco Valli, chief euro-area economist at UniCredit Group in Milan.
Trichet learned the hard way how important it is to have the Bundesbank’s support.
As the euro region faced the risk of splintering over the weekend of May 8-9 last year, Trichet cajoled most of the Governing Council into entering bond markets for the first time to put a lid on soaring yields.
Hours later, then Bundesbank President Axel Weber criticized the move, robbing it of the legitimacy only Germany, Europe’s anchor of stability, can bestow.
Ireland was forced to seek a bailout six months later, Portugal followed in April, Greece is negotiating a debt haircut, and the yields on Italian and Spanish bonds last month rose to euro-era highs of 7.4 percent and 6.7 percent respectively, even as the ECB continued to buy them.
Lender of Last Resort
Euro-area governments have to repay more than 1.1 trillion euros ($1.5 trillion) of long- and short-term debt in 2012, with about 519 billion euros of Italian, French and German debt maturing in the first half alone, data compiled by Bloomberg show.
Weidmann, 43, has said the ECB can’t become a lender of last resort for euro-area governments because that would exceed its mandate and erode its independence. He has backing from German Chancellor Angela Merkel, who fought off French entreaties for the ECB to do more.
Draghi has appeared to align himself with Germany by calling for a “fiscal compact” in the euro area to restore investor confidence. He has also hinted at more ECB involvement if governments agree to that, saying on Dec. 1 that “other elements” could follow.
The Italian’s skills as a consensus builder, honed during his chairmanship of the Financial Stability Board, may stand him in good stead as the ECB contemplates further measures.
In his first month at the central bank, Draghi has acted as more of a moderator during internal discussions, listening to council members and trying to strike broad agreement rather than outlining his own opinion and rallying supporters behind it, according to a person familiar with the matter. Where Trichet would open a policy meeting by starting with his own position, Draghi sums up the opinions of others first, the person said.
“What was quite evident at the end of Trichet’s term was that he was capable of very independent action,” said James Nixon, co-chief European economist at Societe Generale and a former forecaster at the ECB. “As a personal style, Draghi has been more of a committee man, building consensus for actions.”
Draghi’s performance was endorsed in a Dec. 5-6 Bloomberg poll, which showed 63 percent of investors rated him favorably, up from 36 percent in September. A third of those surveyed backed fiscal union as the most effective remedy for the debt crisis with only 15 percent seeking quantitative easing. Still, almost three-quarters said the Federal Reserve has done a better job in handling economic challenges than the ECB, which was viewed the superior performer by just 13 percent.
Chairing his first council meeting on Nov. 3, the same week he took office, Draghi won unanimous support for an unexpected rate cut, the first in two years. He also played a role in last week’s decision by six central banks to make it easier for banks to borrow dollars.
Draghi was educated at the Sapienza University of Rome and became the first Italian to secure an economics Ph.D. from MIT. Fellow MIT alumni include Fed Chairman Ben S. Bernanke, Bank of England Governor Mervyn King and Bank of Israel governor Fischer, who also taught Draghi there in 1974 and 1975.
Bernanke, King and Fisher have all increased monetary stimulus recently as a global economic slowdown threatens to become a slump. Draghi may follow suit.
“The worst-case scenario is that Weidmann somehow undermines him,” said Carsten Brzeski, senior economist at ING Group NV in Brussels. “If Draghi wants to go for the maximum impact, it has to be with Weidmann.”
While Weber, who began this year as the front-runner to succeed Trichet, resigned in February, the ECB’s rift with its German policy makers continues. When the ECB stepped into Italian and Spanish bond markets in August, Weidmann voted against the move and Juergen Stark, a former Bundesbank vice president, announced he will prematurely step down from his role as the ECB’s chief economist at the end of the year.
ECB council member Ewald Nowotny said on Dec. 5 he’s worried that Germany may increasingly have a problem “in trusting the ECB,” and that “it makes sense to make policy that doesn’t isolate the biggest economy.”
At the same time, Germany’s resistance to bond purchases has restricted the ECB’s freedom of movement, said Paul de Grauwe, a professor at Catholic University of Leuven in Belgium.
By focusing solely on stabilizing markets with limited asset buying, the ECB has given investors the impression its program is half-hearted and not enough of a reason to hold onto the bonds, he said. “The ECB decided to buy bonds and then did it in a way that would fail,” said De Grauwe.
Holger Schmieding, chief economist at Berenberg Bank in London, estimates the ECB has bought assets totaling 3 percent of the euro area’s gross domestic product, six times less than the Federal Reserve has bought or pledged to.
With the 17-nation euro area facing recession, ECB policy makers meeting today in Frankfurt returned the benchmark interest rate to match a record low of 1 percent with the second quarter-point cut in as many months, reversing the two increases Trichet oversaw earlier this year. That decision was predicted by 55 of 58 economists in a Bloomberg News survey.
Officials are also considering more measures to stimulate bank lending as the debt crisis tightens access to credit, such as easing collateral rules and offering longer-term loans, said three people with knowledge of the deliberations.
Whether they go further in coming days will depend on the outcome of a leaders’ summit in Brussels that begins today, and whether Weidmann can be persuaded to sign up, said Schmieding. The heads of government are gathering to craft the fifth “comprehensive” solution in 19 months to a debt crisis that’s left Germany and France facing the threat of losing their AAA rating from Standard & Poor’s.
“The risk for Draghi in moving without Weidmann is very, very serious,” Schmieding said. “If he were to be portrayed in the German press as the Italian who is risking hyperinflation to save Italy, he would have a very serious credibility issue.”
Prior to becoming Italy’s central bank governor in 2005, Draghi spent three years at Goldman Sachs in London, where he rose to join the firm’s global management committee, a two-dozen strong executive including then Chief Executive Officer and future U.S. Treasury Secretary Henry Paulson.
Draghi joined Goldman Sachs from Italy’s finance ministry, where he earned the nickname “Super Mario” for overseeing more than $100 billion in state asset sales.
If anyone can steer the ECB through the debt crisis, it’s Draghi, former French president Valery Giscard d’Estaing said in a September interview.
“Draghi belongs to an ancient and solid culture of the Bank of Italy,” said d’Estaing, one of the founding fathers of the euro. “Their culture is not Mediterranean, it’s a northern Italian culture, from Lombardia, serious, methodical, saving, so Draghi brings the kind of culture that matches the current needs of the ECB.”