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Home , Mario Draghi

did not save the , she just bandaged it up By Eric Reguly November 2, 2018 – The Globe and Mail

On the day before the opening of the London Merkel who kept the euro intact. Mr. Draghi Olympics in July, 2012, Mario Draghi, the was her messenger boy. newish president of the European Central Ms. Merkel is now on her way out. This week, , popped into London to say a few words a year into her fourth term as chancellor, she at the Global Investment Conference at announced she would step down as leader of Lancaster House. I was there, expecting him to her centre-right Christian Democratic Union say nothing important on the eve of the greatest (CDU) party and not seek re-election as sporting event the city had ever hosted. chancellor in 2021, when the next federal Mr. Draghi surprised us all. At the time, election is due. Europe was in the fourth year of the financial In recent days, her political obituary has been and debt crises and there were still open written everywhere, and many – perhaps most questions about whether Greece would bolt – of the reports have been rather flattering. Ms. from the euro zone of if would require a Merkel, with Mr. Draghi’s ECB doing the . In his usual unflappable style, he said heavy lifting, spared the euro zone from certain the crisis had gone on too long and promised destruction in 2011 and 2012. She approved the ECB “would do whatever it takes to the of Greece, which kept it inside the preserve the euro." euro zone, albeit at terrible cost to the Greek True to his word, a week later, the ECB people. She may have played a key role in the unveiled a novel firefighting program called effective ouster of as Italy’s outright monetary transactions (OMT), which prime minister in late 2011 when he appeared would buy the sovereign bonds of any country to be paying scant attention to Italy’s soaring that was on the verge of getting shut out of the bond yields. (Mr. Berlusconi later accused Ms. debt markets. Even though OMT was never put Merkel and other leaders of orchestrating a into action, its mere presence was enough to coup against him because he refused to take a put the crisis in reverse. Sovereign bond yields bailout loan from the International Monetary plunged across the euro zone and Italy, whose Fund.) Later, she supported the €2.7-trillion collapse would have wrecked Europe, no ($4.03-trillion) quantitative-easing program longer had to worry about defaulting. and pushed euro zone countries to clean up their fiscal acts. Had Mr. Draghi saved Europe? While the ECB flaunts its independence, I (and other voyeurs While I agree that Ms. Merkel was of the crisis) have always believed it could instrumental in saving the euro during the never go massively off script – as it did with crisis, I also think she’s guilty of having taken OMT – without at least the tacit approval of a bandage approach. The euro is still an ill- Germany, which meant getting the nod from fitting currency for the 19 countries that use it Chancellor Angela Merkel. Germany was, and and could yet rip the euro zone apart. The two still is, Europe’s biggest and most successful populist parties that came together last spring economy and Ms. Merkel its most powerful to form the Italian government had both leader. The ECB was largely designed to wanted to hold a referendum on the euro (a Germany’s liking and was stuffed with former stance they have now dropped), and are German officers. It was Ms. enjoying tormenting Brussels by proposing a 2 budget that defies the ’s debt there is a paradox in Germany’s economic rules. model. The weak Southern European countries have to live beyond their means to soak up the Ms. Merkel’s Germany was, and remains, a German surpluses. But doing so lands them in surplus machine exporting economic hardship economic trouble, hence the need for austerity throughout Europe. It runs a huge trade surplus – lower spending and lower wages – which and the world’s biggest current-account dampens growth. Mr. Auerback calls this cycle surplus, worth about 8 per cent of gross an “economic death loop” for the deficit domestic product. A positive current-account countries. In Southern Europe, the deficit surplus, in effect the glut of savings over countries cannot use currency devaluations to investment, indicates net lending to the rest of make themselves more competitive; the euro is the word. Germany is a huge net lender, which not theirs. generates high profit and low unemployment at home. Incidentally, it was able to fuel the Throughout her reign as chancellor, Ms. export machine partly by suppressing German Merkel never recognized that German wages. surpluses were part of the problem, not part of the solution. She viewed the surpluses as But here’s the catch for the rest of Europe and virtuous, a sign of the mighty German other countries that do not have German-style economic engine revving ever higher. The export-driven economies. To offset German German savings glut persisted and German surpluses, countries such as Italy must spend investment went lacking, suppressing the like mad, running fat deficits to keep buying domestic demand that, had it been high highly competitive German products such as enough, could have levelled the current Volkswagens and Miele dishwashers. In some account playing field. The deficit countries are cases, these persistent deficits lead to crises, as still suffering a decade after the crisis. No it has in Southern Europe. wonder their love for the euro is waning. Ms. Market commentator Marshall Auerback of Merkel did not save the euro, far from it. She Bard College’s Levy Economics Institute says bought time by kicking the can down the road.