On a warm summer day on the eve of the Olympic Games, European Central Bank President Mario Draghi stood up at a business conference in London and dropped a bombshell.
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,» Draghi told the audience in Lancaster House, a grand building in central London, then paused for effect. «And believe me, it will be enough.”
Global markets, full of talk of a eurozone break-up, rallied sharply on Draghi’s unexpected message. Just as shocked were the ECB boss’s aides and his colleagues on the bank’s policymaking Governing Council, none of whom knew Draghi would make such a sweeping promise.
“Nobody knew this was going to happen. Nobody,» one senior ECB official said of the speech.
The truth was, the speech was just the beginning. Draghi was in no position to guarantee «whatever it takes.» His words were a gamble that set off weeks of frenzied backroom diplomacy and public sparring that would severely test the relationships of the main protagonists in the euro zone crisis.
Through conversations with senior ECB officials and leading political actors in the euro drama, most of them on condition of anonymity, Reuters has pieced together a detailed picture of the negotiations that led from Draghi’s late-July speech to his September 6 announcement that the ECB stood ready to buy «unlimited» amounts of bonds issued by the most stricken euro members.
Key to Draghi’s gambit was peeling off enough members of the ECB’s Governing Council. One of them, Jens Weidmann, head of the powerful Bundesbank, has become a vocal critic of Draghi’s plan. He and his hawkish German colleagues believe it will compromise the ECB’s sacred independence and stoke inflation, a taboo in Germany since hyper-inflation in the 1920s gave rise to the Nazis.
Yet getting Germany on board was essential. Europe’s biggest economy, it has served as the bloc’s paymaster during the crisis. If Draghi’s policies ran up against a German wall, they would surely fail.
In the end, Draghi won over everyone on the council but Weidmann, and crucially secured the backing of Europe’s dominant leader, German Chancellor Angela Merkel.
“Mario is someone who, when he is convinced he’s right, is not worried about going ahead and saying he’s right,» said Francesco Giavazzi, an Italian economics professor who has often worked with Draghi since they studied together at the Massachusetts Institute of Technology (MIT) in the 1970s.
This is the story of how Draghi got his way.
Within hours of the London speech, the ECB president’s surprised colleagues had recognized its significance and leapt into action.
Joerg Asmussen, a 45-year-old former deputy finance minister who had joined the ECB in January, alerted Merkel.
Asmussen would emerge as a key player in the hectic weeks to come. A pragmatic German with strong European leanings, he had close ties to all the main players – Draghi, Merkel and Weidmann – giving him leverage and putting him in a unique position to help forge consensus.
While Asmussen informed his Berlin contacts, his French colleague on the ECB board Benoit Coeure sent word to Paris. Within 24 hours of Draghi’s speech, Merkel and French President Francois Hollande had spoken by phone and issued a statement echoing Draghi’s promise.
It was a first sign that the Italian’s risky, and still murky, plan might fly.
But the maneuvering had only just begun. On the other side of Frankfurt, in the 70s-era cement colossus that houses the Bundesbank, officials were seething at Draghi’s London speech and demanding he come clean about his intentions.
Early last year, the head of the German central bank Axel Weber had resigned abruptly in protest at the crisis-fighting policies of Draghi’s predecessor, Jean-Claude Trichet. The Frenchman had embarked on the ECB’S first-ever round of sovereign bond buying to drive down the borrowing costs of heavily indebted countries like Greece, Portugal, Spain and Italy. Weber, who had been in line to replace Trichet at the top of the ECB, denounced this as dangerous money printing to finance profligate states.
When Weber bolted, it opened the door to both Draghi and Weidmann, a former student of Weber’s who had served as Merkel’s top economic adviser in Berlin.
The youngest Bundesbank president ever, Weidmann was now in the same difficult position as his mentor had been. The ECB was on the verge of what looked like a new and ambitious bond-purchase program.
Draghi needed to ensure Weidmann did not flee as Weber had. If he did, it might set off a backlash in Germany that would kill his plan even before it got off the ground.
The two met for coffee in Draghi’s office on the 35th floor of the Eurotower on July 30, four days after the speech.
Displayed on a shelf behind Draghi’s conference table was a black-and-gold spiked Prussian helmet from 1871, a gift from Germany’s Bild newspaper to symbolize its confidence that the Italian ECB boss would adhere to German-style discipline.
The conversation was civil and professional, sources familiar with the meeting told Reuters. But Weidmann made clear he would oppose any revival of bond-buying.
The two most powerful central bankers in Europe were at odds. Within days, Draghi was due to chair the first meeting of the ECB’s policy-setting council since his speech. Markets were expecting him to unveil concrete steps. But he had yet to flesh out his plan, and was still unsure how many of his colleagues shared Weidmann’s doubts.
A dinner in the Eurotower on the eve of the council meeting went well for Draghi. Sitting around a large table in a conference room down the hall from his office, four members of the ECB’s board – Asmussen was on vacation in France – and national central bank governors from the 17 euro member states exchanged ideas over baked goat’s cheese, roast beef and caramel mousse.
Draghi and Coeure presented the outlines of a bond-buying proposal put together by the board. Some, including Dutch central banker Klaas Knot and Finn Erkki Liikanen, had reservations. Only Weidmann was dead-set against it. The council agreed that ECB experts would be given several weeks to hone the plan.
On August 2, as the council put the finishing touches on the statement Draghi would deliver at an afternoon news conference, Weidmann made a special request. He wanted the ECB president to make clear to reporters that support for bond-buying had not been unanimous. Draghi agreed.
A few hours later, Draghi told reporters in Frankfurt and investors watching screens around the globe that the ECB could soon begin buying bonds to reduce borrowing costs in countries like Spain and Italy. But his lack of specifics disappointed markets. And he made one crucial mistake. Instead of sticking to past practice and remaining vague about who had dissented, he named Weidmann as the lone rebel, infuriating officials at the Bundesbank and on the ECB council who sympathized with the German, according to several sources.
“It wasn’t right for him to single out Weidmann,» the senior ECB official said.
In the following weeks, a stung Bundesbank would work overtime to undermine Draghi and his plans through a combination of public statements and aggressive leaks. Calling Draghi «soft,» Bild threatened to reclaim its Prussian helmet.
The debate reverberated in Berlin, unsettling Europe’s most powerful leader.
Angela Merkel has been walking a tightrope since the euro crisis erupted in late 2009, using tough rhetoric to appease an electorate deeply skeptical about supporting crisis-hit euro members like Greece, while nudging bailout deals through parliament to keep the single currency intact.
Draghi’s plan presented the cautious 58-year-old chancellor with a dilemma. Her former adviser Weidmann and many in the conservative German establishment opposed it.
Yet for Merkel it was a godsend. With European leaders at odds over plans to integrate their fiscal policies and banking systems, the ECB was the only body capable of calming markets and keeping the euro zone stable.
Merkel, facing a re-election battle in 2013, was loath to see the euro zone explode on her watch. «Super Mario» had offered her a lifeline.
In private, sources say, the German leader complained to aides that Draghi was being unfairly attacked in Germany because he was Italian. In public she kept studiously quiet for weeks.
Then, in mid-August on a trip to Canada, Merkel backed the ECB chief unequivocally for the first time, describing his policies as «completely in line» with hers and other European leaders.
Back home in Germany, though, a backlash was building.
On August 26, influential weekly Der Spiegel published an interview with Weidmann in which he likened Draghi’s bond plan to a dangerously addictive drug. Days later, Alexander Dobrindt, a top politician from Merkel’s Bavarian sister party, slammed Draghi as a «Falschmuenzer,» or forger.
Even Draghi’s allies seemed to be abandoning him. Asmussen had pulled overnighters with Weidmann in Berlin during the height of the global financial crisis and had studied with him at Bonn University.
The two were very different. Weidmann, reserved and serious, had refused to move his family from staid Frankfurt when he came to the German capital to advise Merkel. Asmussen, his partner and two daughters, couldn’t imagine uprooting from trendy Prenzlauer Berg in Berlin when he joined the ECB.
Born a year and a half apart, they are not close friends but call each other on birthdays and sometimes give each other a heads-up on the content of their newspaper interviews. Both were outraged when Bild, without talking to either of them, ran a story on August 27 saying they had turned against each other.
Asmussen was bothered by Weidmann’s isolation and began pushing back against Draghi, giving interviews and speeches in which he attached tough conditions – such as IMF involvement – to his boss’s bond-buying program. The Italian’s wiggle-room was shrinking by the day.
Then on August 30, Bild reported that Weidmann had considered resigning, just as Weber had. It wasn’t true – the youthful Bundesbank chief never seriously thought about stepping down, according to sources at the German central bank.
But the report heaped new pressure on Draghi. As August drew to a close, the ECB president canceled plans to attend a central bankers’ conference in Jackson Hole, Wyoming. He had a week to forge consensus on his bond-buying plan, yet virtually all the details still needed to be hammered out.
A PLAN COMES TOGETHER
Draghi scrambled over the weekend of September 1-2, and on his 65th birthday a day later, to stitch together his plan.
A reserved man, he had a breadth of experience most central bankers would envy. After earning an economics doctorate from MIT, he worked at the World Bank in Washington, headed the Italian Treasury, did a stint at Goldman Sachs, ran the Italian central bank and the Financial Stability Board (FSB), a global regulation body.
In contrast to his micro-managing predecessor Trichet, Draghi likes to delegate so that he can focus on the big strategic issues. He has earned a reputation for taking his time and listening carefully before making decisions. Once he does commit, people close to him say, he doesn’t look back.
Top secret papers had been circulating at the ECB since June exploring new alternatives for bond market intervention and the conditions that might be attached to it. Draghi needed to narrow down the options and clinch agreement – fast.
By insisting that any ECB bond buying be tied to an aid program involving the notoriously tough IMF, Asmussen had staked out a position that could discourage countries from asking for help in the first place.
His hard bargaining aimed to ensure ECB action did not lead countries to soft-pedal reforms. This was a concern borne of experience. In 2011, the ECB had bought Italian bonds only for Italy’s then-prime minister, Silvio Berlusconi, to drop reform promises days later. The half-dozen or so members of the policy council who sympathized with Weidmann were particularly worried about being taken in again.
Riled by some of the public debate about the ECB’s plans, Draghi argued that the risks facing the euro zone meant the ECB had to act. After a period of intense negotiations, he won out. At the September 6 policy meeting, all members of the Governing Council bar Weidmann backed the plan to buy sovereign bonds on secondary markets.
But Weidmann’s stance and the maneuvering of others sympathetic to his cause ensured any ECB intervention would come with a strong dose of «conditionality».
Countries who wanted the ECB to intervene must first sign up to a formal aid program. IMF involvement would be sought and bond purchases restricted to maturities of up to 3 years. The ECB could choose to sell as well as buy bonds – a veiled warning to countries that it might pull the plug if they failed to deliver on their promises.
The new initiative just needed a name. Initially dubbed «Outright Open Market Operations» or (OOMO), the ECB board ditched that for «Monetary Outright Transactions» (MOT), before settling on the more grammatical «Outright Monetary Transactions» (OMT) shortly before the program was unveiled.
Beginning his news conference with a wry smile, Draghi announced: «Under appropriate conditions, we will have a fully effective backstop to prevent potentially destructive scenarios.”
He then made clear the volume of bond purchases would be unlimited. Euro zone blue chip stocks soared to levels not seen since March and the euro extended its upward march. A week later, Germany’s Constitutional Court gave a green light for Europe’s new bailout fund and Dutch voters handed pro-European parties a sweeping election victory.
After three years of seemingly constant crisis, Europe could breathe again.
PROOF IN THE PUDDING
It is far too early to hail Draghi’s plan as a solution to the crisis.
The central bank has bought no bonds yet and its members are already sending conflicting signals over how the plan will be implemented.
Many questions remain. Will countries need to sign up to tough new reforms on top of those already being implemented before the ECB jumps to their aid? If they do, will it dissuade governments in Rome and Madrid from seeking aid at all?
And are Draghi and his colleagues really prepared to put their money where their mouth is and buy an unlimited amount of bonds? A hesitant approach, inhibited by German doubts, doomed Trichet’s Securities Markets Programme (SMP) to failure.
“It will work if the expectation of unlimited support is not altered or compromised in some way,» said Domenico Lombardi, a senior fellow at the Brookings Institution and former IMF executive board member, who knows Draghi.
“The key word is unlimited,» he added. «It has been said in words, but the actions that follow will have to be consistent.”
Perhaps a bigger question is the longer-term impact of Draghi’s plan on sentiment in Germany. At the single currency’s birth, the ECB was sold to skeptical Germans as a euro-wide carbon-copy of the Bundesbank. Combating inflation was to be its sole objective and its independence sacred.
Now many Germans feel betrayed, some convinced the ECB has been taken over by a cabal of dovish southerners. A poll released the day Draghi announced his plan showed nearly one in two Germans had little or no confidence in him.
Still, Draghi has bought Europe time, and given politicians more space to sort out the mess. The currency’s fate hinges on whether those politicians grab the opportunity Draghi promised them on that warm summer day in London.