Europe must find a Mario Draghi clone

In October, Mario Draghi will step down from the presidency of the European Central Bank (ECB) after having successfully led that institution for the past seven years.

He will do so at a time that Europe is likely to face the most difficult of economic challenges. If those challenges are to be met successfully, the ECB will need to be led by someone with Mario Draghi’s vision and creativity. 

By the same token, the European economy can ill afford to have someone at its helm who would try to make the ECB a clone of the ultra-orthodox and conservative Bundesbank.

It would be an understatement to observe that Mario Draghi has been a highly creative and successful ECB president. 

It was he who in 2012 single-handedly saved the euro in the midst of the eurozone sovereign debt crisis. He did so by dramatically turning around markets by saying that he would “do whatever it takes” to save the euro.

To give his words substance, he convinced a reluctant ECB board to go along with the creation of an Outright Monetary Transaction instrument that gave the ECB as much firepower as it might need to bail out any of its member countries. 

Mario Draghi is also to be credited for having engineered an eventual European economic recovery. Against strenuous opposition from Germany, the ECB’s largest stakeholder, he guided the ECB to adopt a zero-percent interest rate policy and a quantitative easing program that in relation to GDP eclipsed that of the Federal Reserve.

Soon after his assumption of the ECB’s reins, Mario Draghi’s successor will likely undergo a baptism by fire. This will not simply be because he will very likely be confronted by a marked slowing in the European economy. Rather, it will be because he will be confronted by an unusual constellation of major risks that have a high chance of materializing well within the first year of his presidency.

Among the more immediate risks that the new ECB president might have to face would come from the United Kingdom.

In a worst case scenario, the U.K. could crash out of Europe without a deal on the Oct. 31 deadline for a Brexit agreement. This would have devastating consequences for the U.K. economy, which is one of Europe’s major trading partners.

In a more benign but still serious scenario for Europe, the U.K. could be forced into an early and divisive general election that could adversely impact U.K. investor confidence and make for a more difficult European trading environment.

Another risk that could soon materialize might be the U.S. imposition of import tariffs on European automobiles. This possibility has been underlined by the U.S. Commerce Department’s recent determination that European automobile imports constitute a national security risk and by President Trump’s threat to impose a 25-percent tariff on European imports by the end of the year.

Needless to add, such tariffs would deal a severe body blow to a weak European economy in general and to a struggling German economy in particular.

By far the most serious risk that a new ECB head could confront would be a recurrence of the European sovereign debt crisis in a country like Italy. Being around 10 times the size of the Greek economy, Italy could pose an existential threat to the euro.

Recent political developments in Italy suggest that it would be foolhardy to dismiss an early recurrence of the European sovereign debt crisis. Its populist government now appears to be on a collision course with the European Commission as it insists on cutting taxes.

It is doing so despite the fact that this would put Italy’s already large public debt mountain on a clearly sustainable path. It is also hardly encouraging that Italy’s government is toying with the idea of introducing a parallel currency in the form of small-denominated government bonds that could be used for future tax payments.

Confronted with so many real risks to the European economic outlook at a time that the European economy is already slowing, the ECB will need to be both flexible and activist.

One must hope that Europe will be able to resist German pressure to choose a new ECB president who would try to mold the ECB in the Bundesbank’s rigid image, thereby hamstringing its ability to deal with the next European economic crisis.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.