Can the Next ECB Boss Save the Euro?

When Europe’s political elite created the single currency in the 1990s the chances of an Italian running the newly-formed European Central Bank would have been seen as very low.


For a long time Italy had been the sick man of Europe. Devaluing the lira regularly and the subsequent inflation where viewed dimly by the mighty Bundesbank in Frankfurt.

Fast-forward to 2011 and it now looks as if Mario Draghi will replace Frenchman Jean-Claude Trichet as the boss of the ECB at a time when the very future of the euro is in doubt as Europe comes to terms with a mountain of debt.

Draghi appears to have the backing of the euro zone’s biggest governments to take the job, but if he is to succeed and help the euro zone economy navigate its debt crisis, then he is going to have to play a very clever political game if he is to avoid the failure of the single currency.

“If failure means that it does not survive and prosper in its current form, then we think the answer is probably yes,” Capital Economics chief European economist Jonathan Loynes wrote in a research note.

“This does not necessarily mean that the euro is doomed to fail. Now that the currency union’s flaws have been clearly exposed, everything hangs on the determination and ability of the policymakers to address them,” Loynes added.

Given the political divisions in Europe, the determination and ability are going to have to come from Draghi, a man who will now have to serve the greater good under fire from political forces he can do little to control.

In Germany the backlash against bailing out euro zone members seen as too generous with public spending is now a political reality. In France, the hoped-for political leadership of Nicolas Sarkozy has evaporated with France now asking itself whether to elect the socialist boss of the IMF to help steer it through these troubled times.

Change or Perish

Greece, Ireland and Portugal all face years of austerity as the market debates default for one or all three of the crisis-hit smaller players. In Italy, Draghi’s home country, there is either Berlusconi or, if history teaches us anything, a weak non-Berlusconi government.

For months the politicians have been warning the "speculators" not to underestimate the political will to make the euro work, no matter what the cost, but this view of the world is being tested by the realities of the euro zone crisis.

“The assumption that political determination will ensure the euro’s survival looks increasingly shaky. Two euro-zone governments have already fallen – in Ireland and Portugal –trying to implement the policies forced upon them to stay in the currency union,” Loynes said.

“The upshot is that we continue to doubt that the euro-zone will be able to survive and prosper in its current form,” he added.

There is of course an understanding within the corridors of power that things need to change. The very fact that Greek restructuring is being considered as a long-term solution is a key indicator of that.

“The good news is that there is now some recognition of the need to look beyond bail-outs and get to grips with the fundamental problems facing the region,” Loynes wrote. “The recently-announced “Euro Plus Pact” will require members to ensure future fiscal discipline and improve their competitiveness.”

“Some form of change is also the euro-zone’s best chance of survival. Provided that it can be managed in an orderly manner, the exit of some of the weaker economies could leave the remaining currency area looking more optimal,” he added.

The status quo is not working in Loynes' view; changing the status quo is going to be Draghi’s biggest challenge. He might be tipped for the job but if he is the man to help save the euro he is probably asking himself whether he really wants the job in the first place.