Depending on who you talk to, Mario Draghi is either a demon or the savior of Europe. In less than 24 hours at the Shareholders Service Group conference in early March, two observers popular with advisors expressed those polar-opposite opinions about the president since last October of the European Central Bank. John Mauldin of Millennium Wave Advisors derided the very notion that the former head of the central bank of Italy (“Of Italy!”) would be in charge of the European Central Bank. Perhaps unknowingly, Mauldin was echoing German newspaper Bild’s commentary on Draghi’s candidacy for ECB president: “Please, not this Italian! Mama mia, with Italians, inflation is a way of life, like tomato sauce with pasta.” Greg Valliere of Potomac Research (and CNBC) expressed gratitude for Draghi’s leadership, crediting him with moving Europe back from the brink, who while admittedly “throwing money everywhere” had conducted the necessary “triage to save the patient.”
What seems clear, even in the midst of what appears to be a crisis without end in the eurozone, is that Draghi’s leadership at the ECB has averted a much more serious disaster on the Continent. Yes, he did it by printing more euros, but can you say ‘quantitative easing?’ And if there’s one thing we learned in 2008-2009, no nation, no continent, is an economic island. We are all a part of the main, to steal from John Dunne.
In February 2011, The Economist said Draghi was the best person to succeed Jean-Claude Trinchet at the helm of the ECB, whose job, “is to maintain price stability … . Its president must both lead that effort and be its public face. But being sound on inflation, while necessary, is no longer enough. Tomorrow’s central bankers will need to understand the complexities of financial markets and regulation better than their predecessors.” Moreover, the ECB’s president needs “diplomatic deftness” to deal with the bank’s 23-member governing council, and to “work with—and stand up to—Europe’s fractious politicians.” Even Bild eventually came around to support Draghi, ostensibly at the request of German Chancellor Angela Merkel.
Draghi is an economist and, yes, former head of the Italian central bank, but he is also much respected as chairman of the Financial Stability Board, the international association of reform-minded financial regulators. He also has experience in the private sector, though because that experience was at Goldman Sachs, some might think that a negative.
But his accomplishments are significant. He turned away from Trichet’s policy and cut interest rates down to their current 1%. The ECB improved liquidity by pushing out about 1 trillion euros-worth of three-year loans as part of its Long Term Refinancing Operations (LTROs), which helped stabilize European banks by allowing them to refinance their debt with cheaper cash and drove down yields on Italian and Spanish sovereign debt. Some of the now stronger European banks have signaled they may repay those ECB loans early, yet another healthy sign of stabilization. Sound familiar? In a speech in Berlin on March 26, Draghi presented his on the LTROs:”It was not to support sovereign debt markets. It was also not to bolster bank profits. The LTROs were specifically designed to prevent a credit crunch that could compromise the maintenance of price stability in the euro area. With funding markets closed, banks needed liquidity assurance over the medium term to avoid pre-emptive deleveraging and to continue lending.”
Not that this story of stabilization is over, of course. But the LTRO scheme showed Draghi’s ingenuity and diplomatic expertise, both of which will be necessary as Europe drifts into what looks like mild recession followed by recovery. That’s good for Europe and good for us here in the United States.
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