Mario Draghi, president of the European Central Bank, pauses during a news conference... Read More
Taking a window seat, he removed his jacket, unflipped an Ipad and began a game of chess -- something he’d been doing in one form or another for most of the past year. Mario Draghi, hours after pushing through the biggest decision in Europe’s monetary history with a trillion-euro pledge to fight economic decline, was flying home in economy class.
The journey for the 67-year-old president of the European Central Bank took him across a 19-nation currency bloc that has been sliding toward deflation. Yet in the nine months since he warned such a scenario could only be fought off with quantitative easing, he’s needed all his guile and experience to make it happen.
“Like it or not, he’s the savior of last resort in Europe,” said Gene Sperling, who
directed the U.S. National Economic Councils in both the Clinton and Obama administrations. “His whatever-it-takes approach has been very important for confidence in an otherwise disconcerting economic environment.”
The route to QE arguably started on a spring day in Amsterdam last April at an event to mark the 200th anniversary of the Dutch central bank. The audience at the Hermitage Museum included two central-bank chiefs who would later take opposing sides in the QE debate -- Klaas Knot of the Netherlands and Luc Coene of Belgium.
Shock Scenario
Draghi delivered a candid description of how the ECB would respond to three “contingencies.” One was a “worsening of the medium-term outlook for inflation” caused by weaker demand or a “positive supply shock,” and he said the response would be clear: broad-based asset purchases.So it turned out. Gross domestic product came almost to a standstill in the second quarter of 2014, and a glut of oil prompted the start of a precipitous plunge in prices in June.
How the ECB president embarked on a campaign to persuade the Governing Council the time for QE had arrived was told to Bloomberg reporters in recent months by multiple people familiar with the discussions who asked not to be identified.
On Aug. 22, Draghi unexpectedly raised the pressure for QE at an annual gathering of global policy makers in Jackson Hole, Wyoming. He didn’t stay long -- conferring with Federal Reserve Vice Chair Stanley Fischer, his former tutor at Massachusetts Institute of Technology, speaking and then leaving -- but the impact was lasting.
Going Solo
What he did was something that’s been a feature of his actions at key moments in the debt crisis: He went solo. In a late addition to his speech, without telling his board or the ECB Governing Council, Draghi said inflation expectations had fallen “at all horizons.” That confirmed the danger scenario he had set out in Amsterdam, requiring a push to QE, had been fulfilled.The surprise remarks, delivered late in the evening central European time, irked some ECB policy makers, and German Chancellor Angela Merkel spoke with him by phone later.
They also did little to boost inflation expectations. A rally in market measures of the price outlook was short-lived as investors realized the Governing Council couldn’t agree on QE any time soon.
Draghi’s strategy was twofold. First he told politicians they must complement central-bank action with structural reforms and as much public spending as could be tolerated. After meeting French President Francois Hollande in Paris on Sept. 1, Draghi gave his blessing to using “flexibility” within European Union deficit rules, gaining a political ally.
Balance Sheet
The second task was to harness and increase the ECB’s balance sheet, a measure of central-bank support to the economy. That didn’t mean QE just yet. At their Sept. 4 meeting, governors decided only on a final rate cut and a plan to buy asset-backed securities and covered bonds.Again, Draghi pushed the debate along himself. Asked by reporters how big the impact of the new programs would be, he went beyond the statement agreed on by the Governing Council.
The ECB aimed to “significantly steer the size of our balance sheet toward the dimensions it used to have at the beginning of 2012,” he said. That signaled an expansion of as much as 1 trillion euros ($1.1 trillion). One governor watching the briefing on television almost spilled his coffee on hearing the comment, according to a person with him at the time.
Helicopter Policy
The next meeting on Oct. 2, one of two each year held outside Frankfurt, was described by one policy maker as the most chaotic ever. In the Royal Palace in Naples, Italy, with anti-austerity protests outside and helicopters overhead loud enough to prevent some officials hearing the arguments, the Governing Council pushed backed against its president.While Draghi reiterated afterward that he’d steer the balance sheet toward early-2012 levels, he said investors shouldn’t place too much emphasis on the precise size. Disappointed, investors drove the euro higher and sold southern European bonds. The Stoxx Europe 600 Index fell 10 percent in the first two weeks of October.
Draghi, who worked at Goldman Sachs Group Inc. for three years until he was named as Bank of Italy governor in 2005, watched the market reaction worsen. After a particularly ugly day in October when investors dumped Greek bonds and sold stocks, he attended a reception at the old opera house in Frankfurt. Mingling in the crowd, he joked with irony that “the worse it gets, the more I seem to like it.”
German Irritation
At the same reception, Bundesbank President Jens Weidmann’s typical good humor masked growing German irritation. He and Draghi had clashed a few days earlier at the International Monetary Fund meetings in Washington when Draghi referred again to the early-2012 balance-sheet goal and Weidmann said the target wasn’t formal.Germany was losing the fight though. At his Nov. 6 media briefing, Draghi dismissed claims that he was acting without the backing of his colleagues and said ECB officials were preparing more stimulus to be used if needed.
He also tightened his language on the balance sheet by saying it was expected to move toward March 2012 levels. A month later he said the increase was “intended,” despite opposition to the word from at least three officials including Weidmann, and Executive Board members Sabine Lautenschlaeger and Yves Mersch.
Ratcheting Up
By early December, activity at the ECB was ratcheting up. Monetary brains such as former U.S. Treasury Secretary Lawrence Summers and Princeton economics professor Markus Brunnermeier visited to offer advice.At an interim Governing Council meeting on Jan. 7, ECB officials presented bond-buying models of as much as 500 billion euros. In a sign of how sensitive the issue was, governors were asked not to state their own preferences.
Draghi was still striving to avoid sidelining Germany. As well as being the region’s biggest economy, the country set the template for the ECB with its Bundesbank.
Moreover, German officials weren’t isolated. The Dutch central bank’s Knot spoke out against QE, Estonia’s Ardo Hansson and Austria’s Ewald Nowotny expressed reservations, and Mersch was known to have concerns. In all, Draghi risked having a quarter of his Governing Council against him.
Charm Offensive
One response was a charm offensive in the German media, with Draghi jettisoning his reluctance to give interviews and speaking to Handelsblatt and Die Zeit. The latter was unusually personal, with comments on his childhood -- both his parents died while he was high-school age, leaving him to help bring up his younger siblings.Jan. 14 proved to be a milestone when an opinion by the European Court of Justice on Outright Monetary Transactions -- an earlier bond-purchase plan that has never been used -- effectively gave QE a legal green light.
Later that day, Draghi met Merkel in Berlin and outlined the latest QE plans. They included ring-fencing most of the risks associated with government-debt purchases. That sidestepped the Bundesbank’s main objection, that QE undermines the incentive for government reforms, and instead tackled a popular concern that German taxpayers could end up carrying losses originating in other countries.
Final Days
The final days before the Jan. 22 Governing Council meeting were tense. Benoit Coeure, the Executive Board member in charge of market operations, had an early flight back to Frankfurt on Jan. 20 after tussling with Irish Finance Minister Michael Noonan at a conference in Dublin.By noon on Jan. 21, as Governing Council members arrived in Frankfurt, the board still hadn’t circulated a detailed proposal for QE, infuriating some governors. When it did arrive, it was 33 pages long.
In the ECB’s new headquarters in Frankfurt on the morning of Jan. 22, the proposal was revised again and policy makers debated its details right up to the last minute. Those arguments, without names, should be revealed next month as the ECB starts publishing accounts of its monetary meetings.
The result was what Draghi called a “large majority” in favor of spending 60 billion euros a month from March buying debt, with German officials leading the minority opposition. The risk-sharing structure was adopted by “consensus.”
ECB insiders say it wasn’t apparent QE would really happen until the end of December. Yet the thread of Draghi’s argument, from Amsterdam via Jackson Hole, remains clear. He reacted to economic developments by building political alliances where he could, and facing down opposition where he couldn’t.
That sets him up well for challenges ahead, including deciding how to treat Greece after elections on Sunday were won by Syriza, a party that wants to restructure the country’s debt.
“He bides his time and acts,” said Willem Buiter, a former U.K. policy maker and now chief economist at Citigroup Inc. “It was very difficult to herd the Governing Council and politicians in the shadows. He played it in an incredible way given the constraints.”
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