“Productivity growth is the only possible way to achieve prosperity, to create a solid, sustainable foundation for wage increases and to ensure the country’s development, for ourselves and for future generations.”
— Mario Draghi.
Being a central banker is often never easy. They are expected to have the prescience to measure the future course of the economy, enough wisdom to take unhurried decisions, and the intellectual humility to accept mistakes and make amends. Central bankers who rise up to the challenge and become legends in their lifetime often find that legacy under constant scrutiny, as economic conditions change. But building a legacy will likely be the farthest thing on the mind of Mario Draghi, who will take office as the President of the European Central Bank (ECB). He will have to find new ways to fight the existing sovereign debt crisis and nurture the euro-zone economy back to health, without stepping on the toes of European politicians who typically try to influence monetary policy in the common currency region.
The European Central Bank is unlike most central banks. The institution, collectively owned by the central banks of the member countries of the European Union, has a relatively limited mandate compared to other important central banks like the U.S. Federal Reserve. The primary mandate of the ECB is to ensure price stability in the euro-zone, while most other central banks are also entrusted with promoting economic growth and employment. However, each of the European Union member countries has its own economic structure and degree of fiscal health; this makes the ECB’s task more complex. As one of the most important institutions of the EU, the ECB has to ensure that its policy decisions are in the best interest of all member nations and are not swayed by regional political pressures. At the same time, the ECB’s policy interventions have to be decisive and timely to be effective.
Draghi is taking charge at a time when Europe is struggling to recover from the sovereign debt crisis that has led to widespread political unrest and has eroded business confidence. Most economies in the region lagged developed economies elsewhere in the world in their recovery from the 2008 global financial crisis. Even now, projected growth rates for the region are relatively low and below their long-term averages. To make matters worse, the fiscal health of several countries in the region is very weak, and some are on the verge of defaulting on their debt obligations. While the ECB, with the support of the IMF, has been providing emergency financial support to the troubled countries, viable long term plans to rebuild their fiscal health that are politically acceptable remain largely elusive. The substantial spending cuts announced by some of the countries have been met with violent street protests, and the ability of governments to persist with the austerity measures is widely doubted.
I know Mario Draghi. He’s very close to our ideas of the stability culture and solid economic policy.
— Angela Merkel, Chancellor of Germany.
For Draghi, the dense policy challenges and the sensitive political equations will hardly come as a surprise. As the current governor of the central bank of Italy, one of the countries facing fiscal challenges, he knows the severity of the crisis and the possible policy responses that may succeed. Even before this, Draghi has managed his share of crises. He was working at the Italian treasury in the 1990s when the country nearly defaulted on its debt and had to undergo deep restructuring and devalue its currency to pull itself up. His leadership of the restructuring and privatization efforts during this period earned him the nickname ‘Super Mario’. He was also deeply involved in European monetary policy initiatives during the global financial crisis and after, as a member of the governing council of the ECB. Unlike most central bankers, Draghi also has experience in the private sector, having earlier worked for investment bank Goldman Sachs as managing director and vice chairman of Goldman Sachs International.
However, it is another chapter from his impressive resume that makes Draghi uniquely qualified during this crisis to become the head of the world’s second most important central bank. Since 2006, Draghi has been the chairperson of the Financial Stability Forum, and its successor the Financial Stability Board (FSB). An international institution promoted by the G-20 nations and organizations such as the World Bank and the IMF, the FSB is mandated to coordinate and promote the stability of international financial systems, as well as to advance effective supervisory and regulatory structures. The insights gained by Draghi as the FSB chairperson during the worst financial crisis since the Great Depression and the subsequent recovery should serve him well in his new job.
Draghi, 63 years old and father of two, has many things in common with U.S. Federal Reserve chairman Ben Bernanke. Both earned their doctorates in economics from the Massachusetts Institute of Technology, where Draghi was two years senior to the American. Bernanke went on to head the economics department at Princeton before joining the government, while Draghi taught at the University of Florence prior to becoming a policymaker. While Bernanke’s monetary policy leadership during the global financial crisis has been widely acknowledged, Draghi has to now play a similar crisis role at the ECB.
Though not much is known about his personal life, the policy preferences of Mario Draghi are hardly in doubt. While Italy is notorious for fiscal profligacy, Draghi is a staunch believer in conservative economic policies and fiscal discipline. He is widely expected to retain the current ECB policies that have been highly influenced by the economic philosophy of the German Bundesbank. At the same time, Draghi is said to be flexible enough to adopt policy initiatives that are extraordinary or have no precedence, if necessary. The Germans are so impressed with Draghi that a German newspaper endorsed him as ‘the most German of all remaining candidates’ for the ECB presidency, after the leading German candidate dropped out.
Born and educated in Rome, Mario Draghi will be aware of the glory and prosperity that responsible nation builders and policy makers can bring. He will be equally conscious of the pitfalls of administrative recklessness and diffidence. If the ECB is unsuccessful in its efforts to stabilize and reenergize the euro-zone economy, the economic union of European countries will be viewed as ineffective. In essence, an unsuccessful ECB may also kill the dream of a political union for most of Europe, one of the most ambitious political projects in history. It is not often that so much is expected from a central banker. But, if his track record is any indication, the ECB could not have found a better person to take on the challenge than Mario Draghi.
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© Thomas White International, Ltd. 2019