European Central Bank President Mario Draghi was asked in Frankfurt Thursday to describe his institution's role at this seminal moment in his continent's history. Mr. Draghi's answer: "Guardian of stability."
To understand the significance of this remark, consider what Federal Reserve Chairman Ben Bernanke might say if the United States was on the brink of recession and its leaders were about to gather to reset the terms of their economic union.
Mr. Bernanke certainly would see stability as part of his mission. But based on the U.S. central bank's actions of the past few years, it's safe to say that Mr. Bernanke understands stability in a different way. If Mr. Draghi is the unflinching palace guard, Mr. Bernanke is the cavalry commander. One reacts only when absolutely necessary. The other enters the field with guns blazing.
The distinction is important because so many people want the ECB to act more like the Fed. If only the ECB would unambiguously commit to buying the bonds of Italy, Spain, Belgium and any other struggling member of the euro zone, then the biggest risk to the global economy would pass and people would stop talking about the destruction of the euro.
But Mr. Draghi is not Mr. Bernanke, and more importantly, the ECB is not the Fed.
Faced with revised forecasts from ECB staff that predict the euro zone economy will grow no more than 1 per cent in 2012, and could contract by as much as 0.4 per cent, the central bank's governing council opted to cut its benchmark lending rate to a record low of 1 per cent. The ECB also took several steps to make it easier for commercial lenders to get emergency loans, including a commitment to give private banks as much money as they need for as long as three years.
These are significant measures that reflect a recognition that the European economy is in trouble. But they fall short of the "all-in" approach favoured by many financial market participants, especially those in London and on Wall Street.
Speaking to reporters after the ECB's latest policy meeting, Mr. Draghi pushed back against the suggestion that he should start printing money to buy sovereign debt, or at least loan money to the International Monetary Fund for the same purpose.
"We have a treaty," Mr. Draghi said. "The treaty states no monetary financing."
With so many legislatures hamstrung, and the Group of 20 nations unable to co-operate meaningfully on economic policy, it has fallen to the central banks over the past couple of years to play the role of White Knight.
This is easier for some than for others. The Fed's mandate from Congress is not only price stability, but job creation, which in effect gives Mr. Bernanke license to do whatever he can think of to avoid a recession.
The Bank of England and the Bank of Canada have explicit inflation targets, but both institutions have considerable flexibility when it comes to achieving that goal. The ECB, on the other hand, has a very strict remit to keep inflation a little below 2 per cent. Influenced by the German tradition, the ECB's founding treaty is quite explicit on what the central ban can and can't do.
The same way Mr. Bernanke defends his action by referring to his employment mandate, Mr. Draghi defends his inaction by pointing out the limitations of his narrowly defined orders to safeguard price stability. "In the U.S., the primary mandate of the Fed is completely different than ours," Mr. Draghi said.
Central bankers aren't afforded the opportunity to seek a popular mandate via the ballot box. Their credibility – and hence their authority – depends on a clear respect of the mandates they have been given by elected governments. Many think Mr. Bernanke has pushed the boundaries of what the Fed is legally allowed to do, and as a result faces a vocal minority in Congress that wants to impose new limits. Mr. Draghi is a witness to this and is unwilling to risk the ECB's authority until absolutely necessary.
But that doesn't mean Mr. Draghi is putting the ECB ahead of the European economy. He made clear at the press conference that he overcame internal opposition to Thursday's interest-rate cut. But he's not going to let the politicians off the hook. The ECB will do what it can to keep the situation from deteriorating, but it will be up to the leaders at their summit in Brussels Thursday and Friday to turn things around.
"I wish all our leaders the best," Mr. Draghi said. "The ECB is here," he added, before sensing the last part of his remark risked misinterpretation. "That doesn't mean the ECB will respond, by the way."