Innovation/Global Risk

Mario Draghi: Long-Awaited European Hero:

“As Much As They Want!”

By Shlomo Maital



 Mario Draghi, ECB Head

In this blog, I have written countless words severely critical of Europe’s blundering myopic weak-kneed leadership.  Is there nothing good I can say about the EU leadership?

  There is.  Mario Draghi is the new head of the European Central Bank.  When he took over the reins from Trichet in December, he made an immensely courageous move, that saved Europe and probably saved the global economy. 

   “….in December the (European) central bank also quietly began providing emergency loans to European banks. Banks could borrow as much as they wanted provided they posted collateral. They jumped at the opportunity: 523 banks borrowed 489 billion euros, or $647 billion.  In January 2012, many of the major troubled European economies, including Spain and Italy, saw their borrowing costs fall to more affordable levels. Many challenges remained — much of the continent had fallen back into recession — but worries of a so-called Lehman Brothers meltdown subsided.”

      With Greece under fire, paralysis afflicted the European capital markets at the time. When banks can’t borrow, they won’t lend either. And businesses need credit.  A surefire deep crisis was brewing. Draghi cut through the economists’ waffling and acted decisively. True, the plan was in the works before he took over. But Draghi instantly implemented it, and with full force. Anything less would have failed.

    Europe is still in trouble, and nearly all of Europe is in recession, including Germany. Imagine, then, where we would be, had it not been for Draghi’s decisive action to turn on the liquidity tap full force.   The noteworthy part of Draghi’s action was in those five amazing words:  “As Much As they Wanted”.  Banks could borrow as much as they wanted. Unlimited credit.   Few banks borrowed massively ($647 b. is not a huge sum, compared to Bernanke’s quantitative easing); but the fact that they could was crucial. And Draghi is now considering a second round of such lending.  

   At last – an economist, and a European leader, who gets it.  And an Italian!