Draghi talks tough - but Merkel wrote the script

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Hand European Central Bank boss Mario Draghi a gold medal for surprising the markets. His apparently unscripted remarks in London gave a nice little boost to the euro and helped to push up the FTSE-100 by 1.5 per cent.

Mr. Draghi was in town to attend the wholly bland and highly predictable Global Investment Conference, headlined by British Prime Minister David Cameron. Running in parallel to the Olympics, it is designed to get the high-profile executives attending the games, such as Cisco CEO John Chambers and Google CEO Eric Schmidt, to invest even more than they already have in Britain Inc. and end its double-dip recesssion.

During the morning session of central bankers from Britain, Mexico, Brazil and the ECB, Mr. Draghi said two market-pumping things.

The first: "We think the euro is irreversible."

The second: "The ECB will do whatever it takes to preserve the euro and, believe me, it will be enough."

That was enough to send the euro up almost a full percentage point to $1.23 (U.S.)after three saggy days. Most European indices rose; so did commodities.

Why did the Italian say what he did when he did?

Theories vary, but there is little doubt he wanted to deal with one short-term problem and one long-term problem. The former, of course, is the spiking sovereign bond yields in Italy and Spain, the euro zone's third- and fourth-largest economies. Bailing out either country, let alone both, is probably unaffordable. Should either country get shut out of the debt markets, the euro probably would not survive.

The yields on both Italian and Spanish bonds fell after Mr. Draghi's remarks, taking some funding pressure off the two countries. While Spain's yields are higher than Italy's, Italy is actually the bigger worry because, with more €1.9-trillion in national debt, it must roll over enormous amounts of bonds this year. Spain's rollover requirements are relatively small.

The longer term problem is the slow-motion run on the banks in Greece, Spain and Italy, in which deposit accounts are being drained for fear that those countries will exit the euro and reprint their old, weak, disgraced currencies. If that were to happen, the currencies would lose half their value in an instant against the euro, leading to banking, economic, social and political chaos.

As long as investors think a country can leave the euro, the bank run will not end. Mr. Draghi's message that the euro is "irreversible" evidently applies to Greece, the country thought most likely to hit the road.

And what does Mr. Draghi mean when he says the ECB will do "whatever it takes" to keep the currency intact?

It's still a guessing game. The ECB may reopen its sovereign-bond buying program in an effort to bring down yields in distressed countries. Or it could do what the Bank of England does and engage in quantitative easing, the polite term for printing money by the truckload.

Still another option is giving Europe's permanent rescue fund -- the European Stability Mechanism -- a banking licence so it could borrow without limit from the ECB. That might give it enough firepower to scare off investors who think Greece, Italy and Spain are destined to blow up the euro zone. This option has a lot of support among European officials.

You can bet on one thing. Mr. Draghi wouldn't promise to keep the euro intact whatever the cost if he didn't have permission to say so from German chancellor Angela Merkel, Europe's paymaster. That's the real reason the markets were rising this morning.