Mario Draghi Saved the Euro. Will His Successor Be Equally Committed?

https://www.nytimes.com/2019/06/16/business/mario-draghi-ecb-euro.html

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SINTRA, Portugal — Officially, the central bankers, economists and journalists converging on a golf resort outside Lisbon this week will be reflecting on the grand monetary experiment known as the euro, which turned 20 this year.

Unofficially, the event bringing them together, the annual Forum on Central Banking, will be a three-day toast to the man who saved the currency in its most uncertain days: Mario Draghi, the president of the European Central Bank.

Mr. Draghi’s eight-year term will end in October, and European leaders could pick his successor as early as this week. His tenure as the central bank’s leader spanned a perilous period in the short history of the eurozone, which now has 19 members that use the euro and accounts for about one-fifth of the global economy.

There were moments — from late 2011 through 2012 — when it appeared that the eurozone would spin apart, that countries like Greece or Spain would go bankrupt and that the region would become caught in the sort of downward deflationary spiral that can lead to economic depression.

As the eurozone’s political leaders dithered, and countries like Germany balked at bailing out struggling neighbors, the central bank under Mr. Draghi was the only institution standing in the way of disaster.

“He was decisive at a time when the risk of the eurozone breaking up or imploding was as high as it has ever been,” said Ángel Talavera, lead eurozone economist at Oxford Economics, a research firm in London. “After Draghi the E.C.B. has become a different central bank.”

With Mr. Draghi’s exit just months away, there is growing unease about his departure in the midst of a new set of perils, including a trade war, Brexit and signs of an economic downturn. His is one of several top European Union jobs, including president of the European Commission, that are up for grabs. Politicians are haggling over which countries will get which prize appointments, a messy process that analysts and investors fear may not produce a central bank leader who possesses Mr. Draghi’s skills.

The heads of European governments will discuss the top posts at a summit meeting later in the week in Brussels, but they may postpone a decision.

Here is a look at how the powers of the European Central Bank expanded under Mr. Draghi, how the transformation helped the euro to endure, what challenges may arise in months and years to come — and how Mr. Draghi leaves the scene as an unlikely superstar among central bankers.

As the central bank’s president, Mr. Draghi, an economist trained at M.I.T. who had been governor of the Bank of Italy, conjured a series of monetary policy moves once considered unthinkable for the eurozone.

Instead of simply trying to restrain inflation, traditionally a central bank’s only task, the European Central Bank under Mr. Draghi effectively became the guardian of financial stability and economic health in the region. He invented new ways to keep money flowing to stricken banks and beleaguered countries like Greece, Spain, Italy and Portugal. The measures helped create jobs and haul the eurozone out of a deep recession.

He took over in November 2011, shortly after the Greek government ignited a crisis with its admission that the country was nearly bankrupt. The panic soon spread to countries like Italy that had crushing debt loads of their own. Beginning in June 2014, the central bank encouraged lending by effectively paying commercial banks to take the central bank’s cash, as long as they promised to lend it to customers.

Mr. Draghi also announced a so-called negative interest rate. Banks that hoarded money in their central bank accounts were penalized, a move meant to pressure the banks to lend instead. The unorthodox strategy had never been tried in such a large economy.

Then, beginning in January 2015, the central bank issued 2.6 trillion euros, or $2.9 trillion, in new money that it used to buy government bonds as a way of pushing down market interest rates.

The Federal Reserve in the United States had already used the strategy, known as quantitative easing. But many people in Europe thought such bond buying would violate a prohibition against the European Central Bank’s printing of money to finance governments, a practice that can cause runaway inflation if abused. Mr. Draghi disagreed and forged ahead despite court challenges. The central bank won the legal battles and the eurozone escaped a prolonged downturn.

Whoever succeeds Mr. Draghi will get the benefit of his tested arsenal of monetary tools for fighting credit crunches, fending off predatory bond investors and squelching banking crises.

Mr. Draghi, now 71, exuded composure and substance. If he felt fear, he never showed it. A skilled communicator, he was often able to calm jittery financial markets with a few well-chosen words.

In July 2012, as the crisis that began in Greece turned critical, Mr. Draghi told an audience in London that the central bank was prepared to do “whatever it takes” to preserve the euro. The expression of resolve — in effect warning investors not to bet against the currency — was later regarded as a turning point.

Financial markets will most likely test whether Mr. Draghi’s successor has the same mettle.

Still, Mr. Draghi leaves some unfinished business. During his term, the central bank never succeeded in consistently pushing inflation to the official target of 2 percent, the level considered optimal for growth. In May, the annual inflation rate was 1.2 percent.

And long after the Fed raised rates in the United States, the European Central Bank’s benchmark interest rate remains stuck at zero. Mr. Draghi will end his term without ever overseeing a rate increase. This month, seeing signs of slowing growth, the central bank said it would not raise rates sooner than the middle of next year.

New threats — trade wars, Brexit and euro-bashing populists in Italy or France — also loom for whoever takes the mantle.

The process of choosing Mr. Draghi’s successor is unusually complicated because of the other top European Union jobs to be filled. With so much to negotiate, European leaders may not be able to agree on how to fill the positions when they meet in Brussels on Thursday and Friday. A special meeting in the next few months may be needed to make a decision.

One leading candidate is Jens Weidmann, a monetary policy conservative who is president of the Bundesbank, Germany’s central bank. No German has ever been president of the European Central Bank, giving Germany a strong claim on the job.

But Mr. Weidmann is unpopular outside Germany because he opposed many of Mr. Draghi’s innovations. In 2013, Mr. Weidmann testified at Germany’s constitutional court in support of euro opponents who had sued to block the bond-buying program, and there is a fear in some quarters that Mr. Weidmann would not be willing to famously do “whatever it takes” to save the currency.

Other candidates include François Villeroy de Galhau, a governor of the Banque de France; Olli Rehn, a governor of the Bank of Finland; and Erkki Liikanen, a former governor of Finland’s central bank. None have been campaigning as vividly as Mr. Weidmann, 51, who has been softening his tone and trying to shed his reputation as a hard-liner.

Decisions on monetary policy are made by the central bank’s Governing Council, which with 25 members is more than twice as large as the Federal Open Market Committee that sets monetary policy in the United States. The president of the European Central Bank has only one vote. But he — no women have been mentioned as candidates — leads the council’s meetings, answers questions from reporters after monetary policy meetings, and can move markets with his public statements because of the tremendous weight that investors place on a central bank president’s every remark. And when markets are on fire, he must find the words to stop the panic.

The central bank president, although not an elected official, needs political skills to sell the euro to a sometimes skeptical public and to withstand attacks from populists and people who never wanted a common currency and would still like to have their deutsche marks, francs or liras back. Mr. Draghi, who spent a decade earlier in his career as the Italian Treasury’s highest-ranking civil servant, knew how to keep functioning in the middle of political chaos. People still call him “maestro.”

“Draghi’s successor will be an essential figure in determining how much further the E.C.B. would be willing to go if it were to face another systemic crisis,” Mr. Talavera of Oxford Economics said.