I have long held the view that Mario Draghi is the central banker of his generation. Critics would be quick to point out that if he was so great, then the ECB would have acted more quickly and effectively to the euro zone crisis. Instead of waiting until the summer of 2012, something like OMT should have happened much earlier. And rather than the slow rate cuts and silly little liquidity and private paper operations, that large-scale QE should have started as much as a year earlier than it did. I would counter that I doubt if any other ECB President could have delivered any of those momentous policy decisions. Mario has effectively herded the 27 cats on the Committee, including some very (very) opposed to these policies. He may not have got the result as quickly as hoped, but he got there nonetheless through a combination of standing tall in a crisis (“whatever it takes” speech) and bringing others around to his view. He no doubt had the political support necessary (in particular from Angela Merkel), but I think that again was very much down to Mario’s powers of persuasion.
Time will tell how costly the delay will have been in enacting QE, but the early signs are actually pretty positive.
The consummate professional was at his very best in the ECB press conference yesterday. With the immediate worries about Greece off the table, Draghi was able to deliver the strongest presser I can remember. Always one to play to the audience, he even did a little Trichet-like turn, by nonchalantly slipping into the second Q&A answer that ELA for Greek banks had been raised – arguably the most important piece of information to come out of the press conference.
Some other takeaways from the presser:
- Several times Draghi indicated that those who had been calling for the ECB to remove ELA for Greek banks, causing an immediate collapse in the Greek banking system, failed to understand the ECB’s mandate. It is not for them to determine who is or isn’t in the euro zone. They have to work on the assumption that every member remains inside until they are told otherwise. Removing ELA (when its provision was still acceptable in the ECB rules) would have been tantamount to the ECB ejecting Greece from the euro.
- Draghi’s statement that “it’s uncontroversial that debt relief is necessary” is important. While this will ultimately be a political decision, the two key technocratic bodies, the IMF and the ECB, have made very clear their views.
- Draghi made a nice point about the difference between ELA for single institutions and for the entire banking system in a euro zone country. These are very different propositions. The first must remain covert, the second is so obvious to everyone, that making the support public is the safer route.
- Draghi urged national leaders to discuss the Five Presidents report as soon as possible, and use recent events as an opportunity to push forward on competing the union (something I have written about here)
- The ECB will be able to purchase Greek govt bonds as part of QE once the new ESM program starts, so long as the Governing Council deems they are complying with the programme.
Fundamental Macro 
Thanks for these 2 excellent pieces – Draghi + Ever closer union. I definitely share your views.
What do you think of the reported (FT) dispute between Draghi and Schaeuble, where Schaeuble told Draghi that “he was not an idiot”. Do you think it was about Debt relief?
Both have been very active in calling for an absolute necessity of closer fiscal / political union. So I am curious about the nature of their dispute, and wonder if it was about Debt Relief or opening the policy door to any exit.
Indeed, to me the clear proposal of a Grexit policy option by Schaeuble was a major turning point in EMU history. What do you think Draghi thinks about that? Many take it as just a negociation tactic, but I believe that most EU policy maker noted the new policy option clearly.
The message from Germany is clear, the Union is incomplete, something more has to be done. That’s also what Draghi has been saying for years. E. Valls immediately talked about “european govt” (though he sees it as more shared social spending apparently). The French have always been the first to refuse diluting their sovereignty (left and right for different reasons). But things could be about to move now.
Also, I guess that most public opinions – often sympathetic to an Exit (FN or left of socialists in France for instance) – have clearly understood how Greece was on the brink of collapse with its capital controls and only 60eur available per day. So from anectodal discussion with exit sympathetisers (in france) it seems that many now realise how reckless and purely populist this policy proposal has been.
So all in all, to me the EMU is likely to end up strenghtened by this opening of the policy pandora box by Schaeuble.
Do you agree?
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Thanks for the feedback.
Would have been fascinating to have been a fly on the wall for the Draghi/Schaeuble tiff. I imagine it was likely to do with the risks associated with putting “temporary” Grexit on the table, but I think Schaeuble has since said that was just a tactic to focus the minds on the solution. So who knows. As you say, debt relief could plausibly be the other reason, but not sure if that would have been enough to generate the apparent snap.
I think Draghi would have been deeply concerned about the fallout of Grexit – and would have known full-well anything that was dressed up as temporary would really be permanent.
I agree that it is interesting that the French are coming out saying that there needs to be a EZ government. I’m not exactly sure what they mean by that. Would it be separate to the Parliament? Or some sort of sub-group. Or is it just a beefed up version of Eurogroup that gets Treaty status? While the French have traditionally been least keen to give up sovereignty, I think the fallout from the crisis has been both economically and politically hard for them. They are no longer an equal partner with Germany and so I think they may try to use official European bodies to influence outcomes in their interest. They are renowned for having the best technocrats/bureaucrats in Europe!
All in all, I think that the events in Greece (as well as the way it has been handled by Germany/other creditors) does speed up the timetable for “more of Europe”, not less. That is also particularly interesting/challending for the UK and other non-EZ members of the EU. But that is for another post.
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