Draghi authority tarnished as Germany blocks plan

MILAN – Super Mario has taken a hit. European Central Bank president Mario Draghi's efforts to fight the crisis have for the first time been foiled by that most formidable of adversaries: European politics.

Draghi came onto the job in November with a bang — making interest rate cuts that his predecessor had delayed and taking emergency measures, such as cheap loans to banks, that eased the debt crisis temporarily.

So when he declared last week that the ECB would do "whatever it takes" to save the euro, markets believed him and rallied hard. But Draghi disappointed those investors at a press conference on Thursday: instead of announcing new, concrete measures, he said the ECB was working on a plan of action.

The reason is there was one holdout, Germany. The country's central bank, which is traditionally cautious about stimulating the economy for fear of creating inflation, refused to back his latest plan for new bond purchases that would drive down countries' borrowing rates. Instead, the plan will go through committees for approval. Global markets tanked on the news.

Draghi the fleet-footed pragmatist, it seems, has been caught up in Europe's web of politics.

"Today's conference really has shown who is king," said Craig Erlam, a market analyst at Alpari UK.

The German central bank, or Bundesbank, is highly influential within the ECB, and has been uncomfortable with the ECB's emergency measures, both the cheap loans to banks and the purchases of government bonds.

Now, it seems, the Bundesbank is shortening the leash and digging in its heels.

Its refusal to back an ECB plan for more bond purchases, sending it to review by committess, has undermined Draghi's authority and tarnished his image as a policy communicator.

Analysts say Draghi is still trying to push for creative, perhaps even unconventional, solutions to the debt crisis — but he is increasingly facing resistance from some of the continent's more cautious bankers, particularly the Germans, who are wary of taking excessively risky steps.

"I think he had a honeymoon period when he could come in and have the support of the whole ECB board, certainly on day one," said Kit Juckes of Societe General. "That is partly the problem now. He is trying to push the envelope, and he is trying to sail as close to the wind as he dare with the ECB mandate, and I guess the people at the Bundesbank would like to keep him honest."

The ECB's mandate is mainly to control inflation and only then promote growth. The Federal Reserve, by contrast, weighs the two missions equally.

Juckes acknowledged Draghi has less room to maneuver in his policy actions as interest rates are already at a record low.

"The problem is not what he is willing to do. It is what he can do," Juckes said. "I would like him to push right out to the edge of what he can do, because the politicans are not doing enough."

Draghi, who was head of Italy's Central Bank from 2005-2011, is known as a pragmatist, deriving from his training at the Massachusetts Institute of Technology, where he got a PhD in 1977 working under Nobel laureate Franco Modigliani.

MIT economics is often viewed in the profession as more oriented toward public policy and governments' ability can do to solve a problem. A competing school of thought, associated with the University of Chicago and the late Nobel laureate Milton Friedman, views government action with skepticism.

When Draghi came to the ECB, it was with a long history as a crisis manager and behind-the-scenes negotiator.

He was World Bank director for six years, and a top official at the Italian Treasury from 1991-2001, including a period when Italy teetered on the edge of default. He later helped Italy become part of the euro project in time for the 1999 launch.

Despite his background record, some believe that Draghi's flexibility may be overestimated and that he remains committed to both the spirit and letter of the ECB's treaty. In that he may not be quite as far as some think from his predecessor, the notoriously anti-inflation Jean-Claude Trichet.

"There's a part of me that wants to think that Draghi is ... a pragmatic guy who will do whatever is necessary to get it done," said fellow MIT alumnus Karl Whelan, now an economist at University College Dublin. But "the evidence is kind of mixed. He's done some things that are more flexible than his predecessor, but we don't know if that's because he's dealing with more dire circumstances.

Some of his stances, such as rejecting proposals for Europe's bailout fund to borrow from the ECB, show he can be quite dogmatic about the role of the ECB, said Whelan. "I think the jury is out on Mr. Draghi."

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Dave McHugh in Frankfurt contributed to this report.