MARIO DRAGHI was working the room as only Mario Draghi can.
The occasion was a gala at the Old Opera House here in honor of Jean-Claude Trichet, the most powerful central banker in Europe. But in some ways, the evening belonged as much to Mr. Draghi, the Italian who will succeed Mr. Trichet on Tuesday as the president of the European Central Bank in the midst of an economic maelstrom that threatens to tear apart the euro, if not Europe itself.
European leaders took a step toward resolving the crisis last Thursday, with an agreement from banks to take a 50 percent loss on the face value of their Greek debt. Far from heralding an end to the problems, however, the plan ushered in a crucial new phrase in the battle to avert financial disaster.
But despite the challenges awaiting him, Mr. Draghi was in fine form that night earlier this month. Over here, he chatted quietly with Angela Merkel, the chancellor of Germany and a main ally. Over there, he met with Christine LaGarde, the managing director of the International Monetary Fund. And everywhere, Mr. Draghi vowed that there would be no surprises on his watch.
It was vintage Draghi, a performance so subtle and politic that it seemed to please everyone. Which, it turns out, is the Draghi way: people often seem to see what they want to see in him.
One European central banker, for instance, predicted that Mr. Draghi would try to curtail a controversial central bank program intended to prop up financially weak nations like Greece, Ireland, Portugal, Spain and Italy — Mr. Draghi’s native country — by buying those nations’ government bonds on the open market.
The tactic, which in effect has turned the central bank into the lender of last resort from the Baltic to the Mediterranean, is deeply unpopular here in Germany, the Continent’s economic engine. Many here view the program as tantamount to a taxpayer-funded bailout of nations that should never have been let into the euro club to begin with.
But another high-ranking monetary official in Europe predicted just the opposite for Mr. Draghi: that he would be more willing to unleash the full power of the central bank. Both officials spoke on the condition they not be identified to avoid alienating him. Mr. Draghi declined to be interviewed for this article.
The question is whether Mr. Draghi, 63, can satisfy his competing constituencies as he confronts a euro-zone crisis that keeps testing the limits of policy-making.
“I can only guess where he will go with monetary policy,” says Carl B. Weinberg, the chief economist at High Frequency Economics in Valhalla, N.Y.
UNTIL last Thursday, when leaders outlined their latest plan, Mr. Trichet had long argued against a severe reduction in the value of Greece’s bonds. He had maintained that euro-zone economies must pay their debts, even if they are on the verge of insolvency, as Greece is.
Last July, in one of his first big speeches after his appointment had become official, and just before Greece would need a second bailout, Mr. Draghi seemed to break with Mr. Trichet.
“The solvency of sovereign states has ceased to be a foregone conclusion,” Mr. Draghi told bankers in Rome. It is too soon to tell whether he will adopt a more pragmatic, flexible approach at the central bank, which under Mr. Trichet came to be seen as rigid. It is the only major central bank that has not reduced interest rates to near zero.
Those closest to Mr. Draghi say his economic views have been shaped by his challenges at the Italian finance ministry in the 1990s, when Italy was expelled from the euro zone’s predecessor, the European Exchange Rate Mechanism and, like Greece today, came close to bankruptcy.
His record is not without controversy. In Italy and later, as a vice chairman for Goldman Sachs in Europe, Mr. Draghi was a proponent of nations and other institutions like pension funds using derivatives to more efficiently manage their liabilities. In some cases, many experts now contend, these transactions helped mask the finances of Greece and Italy before those nations were allowed into the euro.
People who know Mr. Draghi point to his time at the Massachusetts Institute of Technology in the late 1970s, when economists there emphasized taking a practical approach to solving economic problems, rather than hewing to a particular ideology.
“He is a pragmatist,” says Olivier J. Blanchard, the director of research at the International Monetary Fund who received his economic doctorate from M.I.T. in 1977, a year after Mr. Draghi.
Even so, Mr. Draghi is unlikely to challenge the founding dogma of the European Central Bank, which demands that it adhere to its German-inspired mandate to fight inflation. That he has been endorsed by Germany’s political and economic establishment suggests that he will be constrained from taking an unorthodox approach.
“I have a very high regard for him,” says Otmar Issing, the influential German economist and a former member of the central bank’s executive board.
Article source: http://www.nytimes.com/2011/10/30/business/mario-draghi-into-the-eye-of-europes-financial-storm.html?partner=rss&emc=rss
Merkel Implores German Lawmakers to Back Euro Rescue Measures
“The world is looking at Germany, whether we are strong enough to accept responsibility for the biggest crisis since World War II,” Mrs. Merkel said in an address to the Bundestag, the German Parliament, in Berlin. “It would be irresponsible not to assume the risk.”
Mrs. Merkel also called for a revision of the European treaty to strengthen the union’s ability to police fiscal discipline among members. She argued for stronger regulation of banks, and swift action to get institutions to build up their capital reserves. She implied that investors will have to accept a 50 percent reduction in the value of Greek bonds. And Mrs. Merkel said that Europe should be ready to accept advice and financial aid from the International Monetary Fund.
“Many questions require not only a national and European solution, but also an international solution,” Mrs. Merkel said. She praised Christine Lagarde, managing director of the I.M.F., for her role in the crisis.
With expectations low ahead of a summit of European leaders in Brussels on Wednesday evening, Mrs. Merkel’s speech was a more forceful defense of the euro ideal than has been typical of her in the past. It suggests that leaders could agree to measures to contain the European debt crisis that are broader and more comprehensive than markets and commentators have been expecting.
Mrs. Merkel cautioned that the summit would not produce a “big bang,” and that “this issue will occupy us for years.”
In contrast to the piecemeal approach that has marked European policy so far, she touched on all the main issues of the crisis and called for ambitious measures to ensure stability in the future. For example, she said, the European treaty should be revised so that the union could impose changes on countries that are losing economic competitiveness. Greece’s dysfunctional economy is at the root of its problems.
Mrs. Merkel has often seemed a reluctant European, unwilling to risk domestic political capital on unpopular measures to prop up Greece and save the euro. But she adopted loftier rhetoric Wednesday, reminding members of Parliament of the work that an earlier political generation had done to unite Europe after a century of bloodshed.
“Nobody should believe that another half century of peace and prosperity is a given,” she said. “If the euro fails, then Europe fails. We have a historic duty.”
Mrs. Merkel has been under pressure from other leaders, including President Barack Obama, to be more decisive in response to the crisis, which has become a grave threat to the global economy. Earlier this month, former Chancellor Helmut Schmidt, during an event in Frankfurt at which both spoke, delivered her a lecture on postwar European history and the toil involved in creating a unified continent.
Frank-Walter Steinmeier, leader of the opposition Social Democrats in the Bundestag, complained that Mrs. Merkel’s conversion to European advocate had taken too long. Taking the floor after the chancellor, he said, “I would have liked to hear these phrases a year ago.”
But Mr. Steinmeier said the Social Democrats would support expansion of the bailout fund, the European Financial Stability Facility, and other measures, because it is important to show that the euro project has broad support. Mrs. Merkel did not give details of how the clout of the €440 billion, or $612 billion, fund would be expanded, and said that Germany’s contribution will not increase.
Mrs. Merkel also expressed sympathy for anti-Wall Street protesters in New York as well as similar actions in Frankfurt and Berlin, saying she understood how ordinary people have suffered from the financial crisis.
She took a hard line with the banking industry, saying banks must increase their capital reserves to reduce risk, accept stricter regulation, and be subject to a tax on financial transactions.
Investors must also accept a deeper cut in the value of their Greek bonds, she said. Greece’s debt must be brought down to 120 percent of gross domestic product, she said, a figure that implies a 50 percent reduction in the value of Greek bonds.
Mrs. Merkel took a more forgiving line toward the Greek people, who have been stereotyped as lazy spendthrifts by the German tabloid press. In addition, a strong faction among German economists has pushed for Greece to quit the euro area.
“We want Greece to quickly get back on its feet again,” Mrs. Merkel said.
Article source: http://www.nytimes.com/2011/10/27/business/global/merkel-implores-german-lawmakers-to-back-euro-rescue-measures.html?partner=rss&emc=rss