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‘Mamma mia!’ Has Super Mario succeeded in saving Europe?

Thursday, 25 Jul 2013 | 7:01 PM ET
Mario Draghi, President of the European Central Bank
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Mario Draghi, President of the European Central Bank

One year on from his "whatever it takes" speech and less than two years after taking the helm at the European Central Bank, Mario Draghi has won over some of the harshest critics of his controversial methods to fight the euro crisis. Not least in Germany.

"Mamma mia!" the headline of Germany's Bild tabloid screamed in 2011 after the hawkish candidate Axel Weber withdrew from the race for the top spot at the ECB. "Please, not this Italian," the paper said. "For Italians inflation goes with life like tomato sauce goes with spaghetti."

The prospect of a central banker from the land of the lira, "a currency with a ludicrous amount of zeros" in which a bus ticket used to cost over 1,000 currency units was less than appealing.

(Slideshow: Mario Draghi's greatest hits)

But the tabloid changed its tune. The smooth operating Italian managed to win the support of German Chancellor Angela Merkel and Bild promptly published an image of Draghi wearing a spiked Prussian helmet alongside an article extolling his "German" virtues.

Although his love affair with German media wouldn't last, with accusations he was too easy on heavily-indebted southern Europe, experts agree Draghi scores high on diplomacy.

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"The German public was skeptical. So far he has maneuvered these difficult waters in an extremely capable way," UBS economist Reinhard Cluse told CNBC.

In a CNBC poll of 10 economists and analysts, Draghi received an average score of 8 out of 10 for his performance as ECB chief so far, with many crediting his speech one year ago that the ECB would do whatever it takes to defend the euro for being instrumental in calming financial markets.

(Read more: Conjuring trick? Draghi's long-lasting legacy)

That speech led to drop in government bond yields, easing the pressure on countries such as Spain, which were facing increasingly high funding costs.

But it's also sparked concerns that the ECB has merely bought the euro zone time, and that its monetary policy options are running out, fast.

"By being laissez faire [Draghi] has created a bubble in the debt market," Steen Jakobsen, chief economist at Saxo Bank said. "I think we are at a Bear Stearns moment in terms of the European debt crisis. The euro zone debt crisis has not gone away by him issuing this statement."

George Magnus, senior economic advisor to UBS, who was credited with predicting the U.S. subprime mortgage crisis, agreed it was "hyperbolic" to say the speech – described by some as "legendary" – was a game-changer.

(Read more: Spain has a spring in its step as jobs grow)

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"It was an important communications exercise to convince the market that the ECB was willing to act as a lender of last resort…It bought a huge amount of time."

Draghi certainly still has plenty of challenges ahead. Difficulties at second-tier banks not deemed too-big-to-fail could prompt another banking crisis, Greece could yet default on its debts and Portugal may need a second bailout. Some analysts argue Draghi has created an even bigger problem in buying politicians more time. "The problem with monetary largesse is that it gives governments the excuse to take the foot off the pedal," Magnus said.

Draghi's commitment to buy unlimited amounts of government bonds of crisis-hit countries – a scheme known as "Outright Monetary Transactions" or OMTs – is as yet untested. In addition, Germany's constitutional court is expected to rule by the end of the summer on whether the bond-buying program is even legal.

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But probably Draghi's greatest challenge lies in getting the economy back to life. Small- and medium-sized enterprises are still gasping for access to funds, and unemployment hit 12.2 percent in the euro zone in May. An eye-watering 19.3 million people are out of work.

(Read more: One year on: Did Draghi's promise solve anything?)

"The ECB cannot do QE (quantitative easing) of the type and scale the Fed, the Bank of Japan and the Bank of England have done," Magnus said. "It is not a toothless dragon, but relative to its peers it has significant limitations to go beyond what it has already done."

"We're reaching the limits of what monetary policy can do. To go beyond this, the best thing Draghi can do is organize conference calls and encourage the EIB (European Investment Bank) and governments to do more," Cluse said.

That will require more of Draghi's fabled smooth persuasion.

After the "virtual reality" of the OMT program, Jakobsen warns, "2014 will be the year of reality."

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Contact Europe: Economy

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