Enter the Draghi: is Trichet’s replacement up to the task?
What can we expect from the Italian former banker and economist as he takes the helm of the ECB at this unenviable juncture?
by Chris Sloley on Oct 31, 2011 at 13:14
What does the appointment of Mario Draghi to the helm of the embattled European Central Bank mean for the markets and the future of the eurozone?
Will it be a baptism of fire? Or is Draghi the calming influence needed to steer the monetary union through exceptionally choppy waters?
The former banker and economist last week surprised markets when he appeared to toe Jean-Claude Trichet's line, indicating a reactivation of the ECB’s bond-buying programme. Out-going chief Trichet however quickly sought to clarify these comments, saying they were misinterpreted.
But what do fund managers and commentators make of the appointment and what policies may he have in store?
Pimco’s AA-rated bond manager Andrew Balls says the market may benefit from Draghi having worked in both financial and political spheres but the biggest challenge will be coordinating a uniform approach to the sovereign debt crisis.
Speaking to Citywire in Geneva, he said: 'I don’t think Mario Draghi himself is a significant game-changer, however, what could happen is with a more coherent response, in terms of the European government - the fiscal agencies - the ECB may feel that it then can be more active in terms of its efforts to stabilise European sovereigns, which is a big uncertainty for all investors.’
Unclear as to whether a Draghi led ECB will foster this greater degree of coordination across Europe, Balls looks to the recent past for clues. 'If we look at the pattern of the last couple of years, we have seen, on more than one occasion, when European governments take responsibility for the fiscal side of the problem, the ECB has been more willing to use its balance sheet in terms of being the lender of last resort function.’
Commentators have also offered a mooted response to Draghi’s succession. Writing in the New York Times, Paul Krugman said: ‘I’d still like to imagine that next week Mario Draghi, newly installed as ECB president, will suddenly reveal himself as a supporter of quantitative easing and a 4% inflation target, not to mention open-ended lending to crisis countries.'
‘And all this would be perfectly sensible — much more so than the way the ECB is actually behaving. But it’s not going to happen.’
Market commentators FX Street also painted a bleak picture for Draghi and speculated he is likely to be burdended with a number of issues from day one.
It said: ‘Incoming ECB President, the Italian Mario Draghi has inherited a very difficult legacy as the bank has to participate in solving debt crisis, taming inflation and bolstering growth, at the time European economies are cutting spending to slash their huge budget shortfalls.’
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