Opinion

Hugo Dixon

Why Mario Draghi scores AAA on PPP

By Hugo Dixon
December 17, 2012

Who is Europe’s most powerful man? If one phrased the question as who is Europe’s most powerful person, the answer might well be Angela Merkel. But the deliberate use of the masculine excludes Germany’s chancellor, leaving the field open to Mario Draghi.

This answer can, of course, be disputed. How can one compare power in economics with power in, say, religion? Is it possible to rank the technocratic European Central Bank boss on the same scale, for example, as the Pope?

The best place to start is with an attempt to understand what power is. Bertrand Russell, the British philosopher, said it was the production of intended effects. By contrast, Steven Lukes, one of the top contemporary power theorists, said in an interview last week that power is the capacity to make a difference in a manner that is significant.

What’s appealing about the way that Lukes, a professor of sociology at New York University, puts things is his use of the word “significant”. Whereas Russell just looks at whether people can get their way, the introduction of significance allows us as observers to take a view about whether powerful people are affecting things in a manner that matters to us.

That, in turn, allows us to rank individuals’ power. We can decide that, in Europe at the current conjuncture, what matters most is navigating the current euro crisis and pick our ranking with that in mind. That, indeed, is my view – which, of course, is somewhat subjective.

With this in mind, let’s return to Draghi, whom I’ve known since the mid 1990s. To see why he is so powerful, it is worth considering the three Ps of power: position, personality and pivot points. Having a position that enjoys authority; possessing a personality that is astute enough to maximise the use of that authority; and operating at a point in history where one’s actions have the chance to be pivotal – all these are important ingredients in the power mix. Draghi scores highly on all three.

Look, first, at position. The ECB has the sole authority to print money for the 17 countries that use the euro. Draghi has used this power to huge effect since he took over as president last November. First, the ECB lent banks 1 trillion euros of cheap three-year money, helping to avert a banking crisis.

Then, in July, during a particularly hot phase of the crisis, Draghi uttered his famous phrase about doing within the ECB’s mandate “whatever it takes to preserve the euro”, adding “and believe me, it will be enough”. The ECB later spelt out its willingness to spend potentially unlimited sums of money buying sovereign bonds. The markets calmed down.

The ECB’s power doesn’t just come from its money-printing authority, but also from its independence – which is enshrined in the Maastricht Treaty. Although its president is appointed by politicians, he gets an eight-year term; and, once he’s in place, he can only be removed in the event of incapacity or serious misconduct. Unlike prime ministers and presidents, he doesn’t have to face the electorate. Draghi is in an especially strong position because his term has seven more years to run; so he’s not remotely a lame duck.

The Italian central banker, though, hasn’t just relied on this strong position. His personality is particularly well suited to wielding power. For many years, he survived and thrived while playing Rome’s power games. This is partly because, like a chess Grand Master, he always thinks several moves ahead. That gives him a good understanding of the dynamics of a situation as well as how other key players are likely to act.

Draghi also gives huge importance to credibility. Through his orthodox central banking rhetoric, he convinced the German people that he was really not from southern Europe at all. If he had been considered to be an Italian, he wouldn’t have got the ECB job in the first place. Bild, the influential German tabloid, even celebrated his nomination as ECB president by giving him a Prussian spiked helmet.

Bild did turn on Draghi after his promise to buy potentially unlimited quantities of sovereign bonds. But, critically, not Merkel – whose approval wasn’t required but whose tacit support gave him valuable cover.

Draghi’s credibility with the markets has also magnified his influence. So much so that he hasn’t yet even needed to buy a single sovereign bond. The threat, on its own, has been enough to cool things down.

Position and personality, though, aren’t the only ingredients of Draghi’s power. He has taken the role of ECB boss at a pivotal moment, when the power to print money is crucial. In a financial crisis, the ability to supply liquidity is of paramount importance; in a war, it would be the ability to supply weapons that mattered more.

Draghi has understood the importance of pivotal points in history and used his position and personality to have a big impact. As such, he scores AAA on the PPP of power – in a way that puts him ahead of, say, Italy’s Mario Monti or France’s Francois Hollande, neither of whom would get straight As.

The ECB boss, though, should not let the plaudits go to his head. Much of the euro zone is in deep recession. If growth doesn’t return, the crisis could enter a new ugly phase and his powers will be sorely tested.

Comments
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The NYT editors did you a grave disservice by inserting “Mr.” into “Whereas Russell just looks at . . .” This demeans one of the world’s leading philosophers, a Nobel Prize-winner and a FRS!

Regarding Draghi, I think you overestimate his power. He is constrained by the European Treaty, and acknowledges those constraints. What he wants to do requires treaty modification, and no way that’s going to happen. Handing the keys to its Treasury to France will prove a step to far for Germany and the other “northern” EU members.

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