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EZB Mario Draghi PK in Frankfurt 04.07.2013
Image: Reuters

On the wrong path

Zhang Danhong / sri
January 2, 2015

The President of the European Central Bank sounded like a humble central banker in a recent interview with a German business daily. But in reality, he has become the most powerful man in Europe, says DW's Zhang Danhong.


In an interview with German business daily Handelsblatt, Mario Draghi has once again made it clear that he is determined to use the biggest piece of artillery in his arsenal - the large scale purchase of government bonds. Draghi said: "The ECB governing council has given instructions to the bank's staff as well as the relevant committees of the eurosystem to make technical preparations for any necessary additional measures." In other words, the ECB is set to begin the purchase of euro area sovereign debt soon - a move that is highly controversial, particularly in Germany.

Draghi's main adversary - German Bundesbank President Jens Weidmann has repeatedly likened the purchase of sovereign eurozone debt to offering free drugs to eurozone countries, and a measure that would amount to direct state funding for individual governments, which is prohibited under EU rules.

But Draghi has more than once rejected such claims by stating that his policy was aimed at ensuring price stability. "We have a mandate which is to keep inflation in the euro area just under 2 percent," he noted in the Handelsblatt interview.

With the rate of eurozone inflation having fallen to 0.3 percent in November and the main interest rate cut to near zero, Draghi's reasoning is that only a vast expansion of money supply has the potential to boost inflation. This sounds logical, and may correspond even to Germany's strict interpretation of the ECB's mandate.

A self-defined mandate

But is the ECB president's main concern really ensuring price stability? I have grave doubts about that because the proposed bond purchases appear nothing more than a logical consequence of Draghi's announcement in June 2012 to do "whatever it takes" to save the euro. It was certainly not the inflation target that was in Draghi's mind at the time of the announcement, but rather the preservation of the common currency, which has turned out to be a mandate self-defined by Draghi. With his statement, Draghi indicated that he was willing to go to extremes, even to become the financier of last resort to struggling eurozone governments.

Redaktionsfoto der Wirtschaftsredaktion, Danhong Zhang
DW's Zhang DanhongImage: DW

Such a policy, however, is not covered by the existing rules. The monetary union currently consists of 19 sovereign states. To pursue a policy of quantitative easing for such a diverse group of nations is different to similar actions carried out by other central banks such as the US Federal Reserve or the Bank of England. Many questions arise such as from which countries bonds should be bought, or who bears the risk of a default, just to mention two. Latest developments in Greece, for instance, show that such concerns are not hypothetical at all.

There's no doubt that Draghi's 2012 announcement was well-meant, and has helped to end speculation against the euro in financial markets. Unfortunately though, most debt-laden eurozone governments have failed to use the time bought by the ECB to introduce structural reforms long overdue in their struggling economies. That is why a certain bitterness was evident in Draghi's interview to Handelsblatt when he underlined that he had been stressing the need for reforms for a very long time.

Reform efforts slowing

The probability of his warnings falling on deaf ears is huge. Why should governments carry out painful measures and subsequently risk re-election when there is a central bank that jumps to their rescue in the case of a re-emerging crisis? Ironically, its not just elected governments which are already banking on ECB intervention, but also those seeking to overthrow them. In Greece, for instance, Alexis Tsipras, head of the country's leftist alliance Syriza, has already announced he wants Greece to stay in the eurozone, despite his promise not to meet the bloc's demand for fiscal reform. Apparently, Tsipras - who stands a good chance of becoming the next Greek Prime Minister - secretly hopes the ECB's cheap money will somehow manage to paper over the cracks in the monetary union.

Through his promise and self-defined mandate to preserve the euro by doing "whatever it takes," the ECB chief has led himself into a dilemma. On the one hand, Draghi needs to keep the dose of cheap money high for many eurozone countries, which on the other hand, undermines their motivation to cure themselves.

Most powerful player

It would not be fair, however, to make Draghi solely responsible for the ECB's current monetary policy. Already in May 2010, his predecessor Jean-Claude Trichet embarked on a course of rescueing the euro by all means. He started to buy Greek government bonds and launched the massive bailout for the country. The move was followed by offering cheap money to the eurozone's commercial banks, by turning a blind eye to the value of their collateral, and by virtually granting free licenses to the eurozone's individual central banks to print money.

Quite obviously, Mario Draghi enjoys his role as Europe's mightiest man, which has become evident by his recent refusal to succeed Giorgi Napolitano as Italian president. Draghi, who was hottly-tipped for the post, told Handelsblatt that he didn't want to become a politician. Small wonder: Who would want to be a politician when he is already more powerful than any other politician in Europe?

The ECB chief is eager to make the impression that he's just a humble servant of the central bank's cause, and a mandate that he interprets as "narrow" and dedicated to "maintaining price stability." Much would be achieved if Draghi would really stick to this mandate because the single European currency is a political project that rises and falls with the determination of politicians to play by their own rules.