He’s called Super Mario for a reason. Facing down Greek radicals, engineering an economic recovery, keeping banks from toppling, fixing the bond crisis, and getting sceptical Germans to agree that printing money will not bring about the end of civilisation: European Central Bank (ECB) president Mario Draghi is a human marvel of multitasking. He’s also the most powerful actor in the Eurozone, almost singlehandedly cowing the markets to such a degree that not even the most daring of bond and currency traders can muster the courage to defy Mr Draghi.
His now famous “whatever it takes” comment, made in July 2012 at the height of the euro crisis, was enough to calm the markets. Nothing short of a cease and desist order directed at sanguine traders, Mr Draghi made it crystal clear that any and all attempts at causing his euro to implode, or slide beyond the ECB’s limits, were doomed from the outset.
The comment drove bond yields to a historical low, helping countries such as Spain, Portugal, and France weather the turbulence. The statement also marked a reversal in the fortunes of the euro. A year later, in April 2013, Mr Draghi noted that the markets consistently misjudge the amount of political capital invested in the common currency: “People vastly underestimate what the euro means for Europeans.”
Nobody in Europe, or indeed the world, commands deeper pockets than the ECB president who is currently engaged in buying up government bonds to the tune of around €80bn per month in order to encourage economic growth and avoid the dark spectre of deflation. He has up to €1.75 trillion to play with – more if need be – kitchen sink not yet included.
In his four years at the helm of the ECB, Mr Draghi has established a formidable reputation as a man who doesn’t respond well to being challenged – and one who doggedly pursues his objectives. Right now those goals include coaxing Eurozone member states into handing over yet more sovereignty to create and empower the Europe-wide institutions needed to safeguard the euro’s future – a message not always appreciated by the intended audience. In a speech to the European Parliament, Mr Draghi reminded the assembled MEPs that the monetary union remains incomplete: “A failure to harmonise economies and create stronger institutions puts at risk the long-term success of the Eurozone when faced with an important shock.”
Perhaps not as loath as required to proffer comment on developments in the political sphere, Mr Draghi can muster but little patience with the ongoing Brexit saga. He intervened forcefully when British Prime Minister David Cameron last December suggested the EU be rebranded as a multicurrency union, reflecting the euro opt-outs secured by his country and Denmark. The ECB president was quick to torpedo that suggestion, referring to existing treaty obligations which put all EU member states that did not obtain opt-outs under an obligation to adopt the euro sooner or later.
Poland and Sweden in particular have dragged their feet on this point. Earlier, the Swedes were chided for suggesting the adoption of the euro could, at some point, be put to a referendum. The ECB had to remind the government in Stockholm that treaty obligations, once signed, are not subject to ratification by popular vote. Polish Prime Minister Beata Szydlo also displays a distinct lack of enthusiasm for embracing the common currency, recently describing the euro “as a bad idea that would make a second Greece out of Poland.” However, that probably says more about Poland than it does about the euro.
What worries the ECB most is that a union split into two regulatory spheres would harm the euro project should the non-euro part of the EU suffer less strict monetary and fiscal regimes. Already now, the ECB is none too happy with the unfair advantage enjoyed by the UK’s relatively lax attitude towards deficit spending.
Always the euro’s most stalwart defender, Mr Draghi is concerned that the UK’s distinctive edge may lead others to argue that joining the euro is a losing proposition that they cannot be forced to sign on to – treaty or no treaty – since doing so violates the equality principle.
The ECB takes its guardianship of the common currency very serious indeed and has not yet fully recovered – or forgotten – the four-year court battle with the City of London over its location policy – a battle the bank lost. The ECB had initially demanded that clearing houses depending on the bank’s liquidity move their operations from London to the Eurozone.
With the UK now seeking added protection for the City from discrimination against British financial services providers, the ECB is not about to hoist the white flag. This time supported by most Eurozone member states, the bank is readying for a second fight should UK voters in June decide to take their country outside the EU. It is widely expected that the bank will deploy its significant weight and firepower to ensure that no official Eurozone business is conducted in the City of London. Even remaining inside the union, the British cannot expect to have a say in the bank’s governance: “Britain cannot govern the ECB because they do not participate in it and that is something we cannot change,” said one EU diplomat.
One of Mr Draghi’s most important battles is the one he has been waging against deflation. The ECB has repeatedly failed to meet its target of an average 2% inflation for the 19-member Eurozone. As price levels again progressed into negative territory last March, the ECB was quick to augment its quantitative easing (QE) programme by €20bn monthly.
The bank now mulls additional measures to stoke inflation and economic growth. One of the more controversial policies under consideration has the ECB intervene directly in the currency market, selling euros wholesale in an attempt to weaken the surprisingly resilient common currency. The strength of the euro has caught a number of pundits off-guard. Notwithstanding the vast amounts of QE cash being released onto the Eurozone, the euro gained significant ground against both the US dollar and the UK pound in February and March.
A weaker euro is key to reviving the Eurozone economy. As a large exporter of manufactured goods, Europe stands to benefit significantly from depressed euro rates. Devaluation would immediately result in increased sales and would drive up inflation as well. Though central banks have a poor track record of manipulating exchange rates, the ECB need not leverage its own reserves, but may simply “print” the funds required – killing the proverbial two birds with one stone, albeit a big one.
Even Bigger Guns
Since the start of 2016, Mr Draghi has repeatedly hinted that he is now ready to roll out even bigger guns to bend the market to his will, and Europe out of stagnation. Directly buying equities is one of the guns the ECB has left in its armoury. Such a move would drive up equity prices, providing a windfall to investors who – so the script goes – would soon start spending all that extra cash. The approach seemed to have worked well in both the UK and the US.
Another option under consideration is to further recapitalise banks. The thinking is that, if banks are not willing to lend enough, it may be because their balance sheets do not make for happy reading. The ECB could, quite conceivably, help out directly by adding to the bank’s capital.
Then there is the esoteric option – the one pioneered by the Bank of Japan: helicopter money. While nobody envisages the ECB dropping euros into people’s bank accounts, there is nothing to stop the bank from underwriting a large-scale investment fund to, say, upgrade the Eurozone’s economic infrastructure – highways, bridges, ports, telecom backbones, and the like. This would almost instantly provide tens of thousands of jobs and, as an added bonus, circumvent rather conveniently the fiscal restrictions placed on member states.
Disconcertingly, Mr Draghi had to admit that his QE programme, while helpful, may have had less of an impact than expected. The funk suffered by Eurozone economies since the sovereign debt crisis erupted in 2009, has only been shaken off partially, and that, mostly, thanks to a significant tailwind. Lower oil prices bolstered consumer spending and helped energy-intensive industries while a slightly weaker euro encouraged exporters. The latter of the two tailwinds has already died down – adding pressure to the need to roll out additional stimulus measures.
While none of the options can be easily implemented, it would be a serious mistake to underestimate Mr Draghi’s resolve to revive the Eurozone’s economy and kill off deflation. His pledge to do “whatever it takes” was not made lightly and has already been shown to have considerable bite. Mr Draghi’s ECB will surprise markets again and again – and again. There is no stopping the man or his mission.