MARIO DRAGHI today succeeds Jean-Claude Trichet as president of the European Central Bank (ECB). He could not have taken over at a more difficult or challenging time, as the battle to save the euro and to stabilise the euro zone enters a critical phase following last week’s European debt crisis summit – the 14th in less than two years. Mr Trichet’s crisis management skills – most notably since 2007 – have been critical in ensuring the survival of the euro.
As ECB president, he acted boldly and showed leadership and courage, qualities that Europe’s political leaders have so clearly lacked, as exemplified by their frequent resort to euro-crisis summitry, and their sustained failure to address and resolve the euro zone’s problems. Former French president Giscard d’Estaing asked recently: who among Mr Trichet’s critics could have achieved a better result? In the circumstances, no-one.
Mr Draghi, an Italian and a former economics professor, will do well to match his predecessor’s performance. The ECB is an independent and unelected body, with a 13-year history that, latterly, has been marked by controversy and division. His first task will be to establish his credibility with a sceptical German public which takes a narrow view of the ECB’s role in a monetary union – controlling inflation by adjusting interest rates, but doing little else. Mr Trichet’s activism has been evident in the ECB’s huge lending facility to assist illiquid euro zone banks – from which Ireland has received €154 billion in loans – and in the bank’s much more limited intervention in government bond markets to help lower borrowing costs, and to ensure financial stability in the euro zone. This latter activity has been strongly criticised in Germany, prompting the resignation of two of the ECB’s German officials, including the head of Germany’s central bank, the Bundesbank.
The ECB has had a difficult task in overseeing a monetary union and a common currency without the benefit of a fiscal union and a common fiscal policy among the 17 euro zone countries. For years, France and Germany flouted with impunity the Stability and Growth Pact, which was designed to control excessive budget deficits. The ECB’s reluctance to accept the role of lender of last resort to governments – as opposed to banks – stemmed from Mr Trichet’s belief that governments rather than the bank should provide the ultimate backstop. A major test for Mr Draghi will be whether he maintains, or modifies, that line, not least if placed under market and political pressure to buy more Italian government debt.