Two thunderous cheers for Mario Draghi, president of the European Central Bank. By converting the bank from an interest-rate setter to the euro zone's chief firefighter, Mr. Draghi has saved the region from probable destruction not once, but twice since 2012, when he promised to do "whatever it takes" to keep the currency intact. For that, he has been called the real president of Europe – sorry, Angela Merkel – and he did it by outwitting the German central bank officials who opposed the ECB's personality change.
But by driving interest rates down to zero and launching bond-buying programs that sent yields – the cost of borrowing – to bargain-basement levels, he, in effect, ruled that the sinners do not have to bear the full cost of their sins. No wonder countries such as Italy, whose 10-year bond yields have gone to less than 2 per cent from the crisis peak of 7 per cent, are feeling little urgency to get their economic houses in order
When Mr. Draghi, a former Goldman Sachs banker who became governor of the Bank of Italy, replaced Jean-Claude Trichet as ECB boss in late 2011, Europe was an ungodly mess. Greece, Ireland and Portugal had been bailed out and Spain had received a back-door bailout through the European rescue of its banks. Bond yields were soaring and the fear was that Italy, the euro zone's third-largest economy, would get shut out of the debt markets too. Since Italy was too big to save, there was no doubt that its financial collapse would kill the euro. If all that were not bad enough, Mr. Trichet had hiked interest rates in 2011, near the peak of the crisis, in one of the most badly timed moves in the history of rate setting.
With the crisis getting worse by the day in the first half of 2012, Mr. Draghi made his now-famous "whatever it takes" speech, hauled out the big bazooka and launched OMT – outright monetary transactions – which would allow the ECB to buy the bonds of any solvent country that was having trouble financing itself. The program has yet to spend a single euro; its mere presence was enough to scare off the bond vigilantes and send yields plummeting.
While the program spared the euro zone, and thus Europe, from economic meltdown, Germany was not happy about the ECB's new role as lender of last resort; Jens Weidmann, president of the German central bank, voted against OMT. The German view was that high bond yields were symptoms of appalling economic management and that it was up to national governments to fix their mistakes, not for the ECB to cover them up. The legality of OMT went to the German Constitutional Court, which ruled in June that the program complied with European Union law. Victory for Mr. Draghi.
His biggest victory – the quantitative easing (QE) program – was yet to come. It is here that he pulled off a diversionary tactic that exploited his crafty nature to perfection and bamboozled his opponents.
Last autumn, when inflation was falling rapidly and threatening to turn negative (which it would do), Mr. Draghi wanted to stimulate the economy and boost prices by launching QE, the mass buying of bonds across the euro zone. The Germans, of course, opposed it and the debate focused on who – the ECB or the national central banks – would be on the hook for any sovereign bond losses, which would happen if, say, Greece were to leave the euro. Mr. Draghi let the debate rage on, probably knowing full well that he would allow himself to bend to German pressure and scrap the notion of risk-sharing. Indeed, the ECB in the end agreed that most of the bond losses should be shouldered by the national central banks and the Germans, albeit reluctantly, signed on to the €1.1-trillion QE program.
The QE program seems to be working. Inflation, while still low (because of sinking energy prices), is off its bottom and economies are perking up, especially the hard-hit Spanish and Irish economies. The program was put in place soon enough to shield the euro zone from the worst effects of the Greek crisis. If the QE victory were not enough, Mr. Draghi is now busy reviving the Greek banks with a small torrent of emergency liquidity injections, eliminating the immediate threat of Greece's exit from the euro.
By the time QE came to life, any notion that the ECB was merely and largely concerned with controlling inflation vanished. Under Mr. Draghi, the bank has emerged as the euro's great preservation artist and choreographer of economic growth. Even if he were to resign tomorrow, he would go down as one of the most effective of Europe's central bankers, and certainly the most effective ECB president, since the launch of the euro in 1999.
But Germany's worry that the ECB is becoming effective to a fault should not be entirely dismissed. Taking the edge off the euro zone crisis has also taken the edge off the governments' incentive to reform, potentially laying the groundwork for the next crisis. That's the bad news. The good news is that the euro zone, against all odds, remains intact and more or less functioning. For that, the region can thank Mr. Draghi's deft game of brinkmanship with his German opponents.