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Draghi’s strategy: keep it simple

Draghi’s strategy: keep it simple

ECB president uses fewer words than Trichet

by David Marsh

Mon 26 Mar 2012

Keep it simple. That’s the view of European Central Bank president Mario Draghi. Asked by the Bild newspaper for a message for the German people, Draghi could have waxed philosophically about war, peace, stability and the Weimar Republic. He didn’t. In an interview with the best-selling German daily last week, he replied succinctly: ‘Keep it up!’ He was speaking about fighting inflation – which he called ‘a German virtue’. All part of a strategy to win friends in the euro’s heartland.

Draghi is being bludgeoned by a battery of Bundesbankers to maintain a tough line. Whisper it softly, but the ECB chief is far from discomfited by the 29 February letter to him from Bundesbank president Jens Weidmann (which somehow found its way into the conservative Frankfurter Allgemeine Zeitung) complaining about the ECB’s looser policies on collateral.

Draghi has to persuade errant euro governments to use the breathing space of the ECB’s €1tn liquidity injections to take real action on economic reform. The drumbeat of Bundesbank criticism, including a new German campaign for an early exit from the liquidity moves (perhaps by some form of reverse repurchase agreements), are, for Draghi, useful instruments to coax Europe’s political leaders into maintaining austerity.

As part of his performance for Bild, the ex-Banca d’Italia governor posed playfully in a Prussian spiked helmet to demonstrate his espousal of German values. That wasn’t the style of his predecessor, Jean-Claude Trichet, who could never resist using three complex sentences when one simple one would have been quite enough. In a similar Bild interview in January last year, Trichet expounded ponderously: ‘I have devoted my life to bring the friendship between France and Germany to the benefit of Europe as a whole.’ Draghi, in his Bild appearance, said simply that Germany was ‘a model’ that other countries should emulate. He even said he agreed with Weidmann’s strictures about the liquidity injection.

The one passage where Draghi might have been more cautious was when he told Bild journalists ‘The worst [of the crisis] is over.’

Jürgen Stark, the former ECB executive board member who announced his departure in September and finally left at the end of December, said the same thing as long ago as July 2010 – but had to eat his words later as euro developments rapidly deteriorated.

Ex-Bundesbanker Stark is in a bitter mood now, judging from an extraordinary six-page interview on Friday in Germany's Handelsblatt business daily. Stark contradicted Draghi’s relative optimism and backed Weidmann. He said the euro zone was not yet out of crisis, inflation dangers had increased and ‘the world financial system is on drugs.’

Stark broke with European central banking tradition by calling on the ECB to publish how members of the ECB’s governing council vote on interest rate decisions.

‘Trust is being lost in the central bank's competence to do the things it is obliged to under its mandate,’ he said. ‘We are not yet out of the crisis - neither out of the financial crisis, nor the economic crisis, nor the public finances crisis,’ he added. Uncompromising stuff. The next few months will show whether Draghi or Stark is right. My hunch is this will not be the last time Draghi says the worst is over.

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