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Matthew Lynn's London Eye Archives | Email alerts
Oct. 26, 2011, 12:01 a.m. EDT
By Matthew Lynn
LONDON (MarketWatch) "â? First things first. Can everyone agree "â? and headline writers in particular "â? that once Bank of Italy Gov. Mario Draghi takes over as the new president of the European Central Bank next month, there aren't going to be any references to Super Mario. Or to fixing the plumbing.
Second thing. Forget about Draghi being the man to save the euro /quotes/zigman/4867933/sampled EURUSD +0.1115% . Any new boss, whether he is running a country, a central bank, or a company, can expect to arrive on a wave of hype and anticipation. When a new person takes charge, we always feel there is chance to start afresh "â? that's why football teams always win a few games when a new coach takes over, even when the men on the field are the same clueless bunch they were the week before.
But the truth is that Draghi arrives in his new job with two huge handicaps. He is an Italian who is going to have an uphill struggle to convince sceptical Northern Europeans that he believes in sound money. And everything about his background and record suggests he is wedded to a very orthodox view of what central bankers should be doing "â? at a moment in history when only radical, imaginative policies will be able to salvage a single currency that is teetering on the edge of collapse.
Draghi could not be making the journey from the Bank of Italy's Rome headquarters to the ECB's base in Frankfurt at a more difficult time.
The list of issues piled up in his in tray is formidable. Greece, even if it gets its latest slug of bailout money, is going to default soon, with consequences that no one quite knows yet. The European banking system is going to be recapitalized, although no one knows if the sums raised will be anything close to enough to stop finance houses from collapsing. In Belgium, Dexia has already gone down, and more may well follow soon. The ECB has already been buying up Spanish and Italian bonds in an effort to stop those countries from following Greece and Portugal into bankruptcy, but how many bonds the bank will have to buy, or what it does with them once it owns them, is still not clear.
WSJ's Thorold Barker stops on Mean Street to discuss European finance ministers postponing Wednesday's planned meeting on a rescue plan for ailing euro-zone economies.
As if all that were not enough, Draghi has all the usual decisions central bankers have to grapple with. The euro-zone economy is slowing down sharply, and he may well need to cut interest rates fast to stop that turning into a full-blown recession. At the same time, he also needs to keep the lid on inflation "â? the latest figures show prices in the euro-zone rising 3% a year, the fastest rate for three years. Finding the right path to tread between those two objectives will be daunting enough, even without the other issues surrounding the euro.
It is so much to deal with, you wonder why he didn't go off and get an easier job instead "â? like being prime minister of Somalia, for example, or running Silvio Berlusconi's press office.
He isn't going to get a few weeks to ease himself into the job, find out how to get a coffee, and learn how to pronounce his secretary's name. He'll need to hit the ground running.
The trouble is, the prospects don't look good.
It is always harsh to judge a man before he has even begun. But the evidence suggests Draghi will not be up to the task he faces.
There are two big problems.
First, he is Italian.
Naturally, there is nothing wrong with having an Italian running the ECB, in principle. Draghi is eminently qualified for the job. He took his doctorate at the Massachusetts Institute of Technology under two Nobel-prize winners, Franco Modigliani and Robert Solow, and spent 10 years as a professor at the University of Florence before joining Goldman Sachs. He is a more serious economist than either of his two predecessors. He knows the textbooks, and how the markets work.
But he will need to prove himself to the Germans, the Dutch and the Finns, all of whom are suspicious of Italian central bankers. Think of the Nixon in China comparison. Just as only a right-wing Republican president could sell Americans the idea of a rapprochement with the Chinese Communists, so only a stern Bundesbank hardliner could sell Germans the idea of loosening monetary policy, and buying up vast quantities of Italian debt. Draghi doesn't have a chance. They won't listen to him because of who he is.
Next, during his time at the Bank of Italy he hasn't once deviated from the conventional wisdom that the only task of a central bank is to deliver price stability. Every lecture he has delivered in that office has emphasized the importance of price stability, and of merging Europe's currencies, despite the evidence that it hasn't worked. Italy has barely grown in the decade since it joined the euro, whereas it was a pretty successful economy in the 1980s and 1990s. To Draghi, however, that has nothing to do with the single currency.
In the coming few months, the ECB needs to do two things to save the euro. One, cut interest rates fast to stop a full-scale recession. Two, engage in massive quantitative easing, so it can print money to buy up the debt of the struggling countries. Neither are a long-term fix. But they will keep the single currency going for a few years.
The trouble is, Draghi looks unlikely to go for either. Because he is Italian, and treated with suspicion in Germany, he will have to prove himself tough on inflation. And everything about his record suggests he is committed to the orthodox view that the job of the ECB is simply to control inflation.
The chances are Draghi will simply continue with Jean-Claude Trichet's conservative policies "â? and they will lead to the euro's swift collapse. And there won't be anything super about that.
Matthew Lynn is chief executive of Strategy Economics, a London-based consultancy. His most recent book is "?Bust: Greece, The Euro and The Sovereign Debt Crisis' published by Wiley
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