The Importance of the Mario Brothers
They are not really brothers, but Mario Draghi and Mario Monti are countrymen and are doing a great deal to respond to the European debt crisis in ways that were unimaginable until very recently.
Draghi’s accomplishments are more recognizable. He is the unlikely head of the ECB. The job was supposed to go to the German Weber, who resigned in a huff because the ECB decided by an overwhelming majority to buy European sovereign bonds (in a limited way, while sterilizing the impact on money supply). At nearly the last minute, Weber’s exit left Germany with no other suitable candidate, allowing Draghi to fill the vacuum.
Draghi has achieved a great deal in a little less than 100 days in office. He has led the ECB to completely reverse the rate hikes Trichet had overseen in April and July 2011. He has creatively offered a three year financing facility, which following its introduction has seen peripheral sovereign yield curves steepen, with short-term bond yields falling. Pressure on Euribor has eased.
Under Draghi, the ECB has also addressed the squeeze on collateral by liberalizing further what is acceptable. At the next 3-year long-term repo operation (LTRO) late next month, the ECB will accept bank loans, for example, as collateral.
Given the composition of their balance sheets, there has been some suggestion that French banks have the most the assets under the new collateral definition. Yet other banks, like in Italy, also stand to benefit and given their financial straits may benefit even more. Toward the end of the month, the Bank of Italy is expected to outline criteria for Italian banks who intend on using bank loans as collateral at February 3-year LTRO.
One gets the sense that Draghi has not exhausted his intended policy response to the crisis, although he seems to be as adamant as Trichet that the ECB will not become the backstop for sovereigns. We suspect that if the preliminary signs of stabilization of GDP that Draghi noted prove for naught, that lower rates are possible. Additional LTROs are possible and they could be even longer than 3-years.
While Draghi is an unlikely head of the ECB, Monti is Italy’s unlikely prime minister. Berlusconi, the former prime minister, survived numerous votes of confidence and even at the end, he seemed more defeated by the bond market and arguably German Chancellor Merkel, than his domestic rivals and opposition.
Monti has the gravitas that Berlusconi lacked and it is telling that he is included alongside Merkel and Sarkozy in pre-summit discussions/negotiations. Of course, it is possible that Merkel and Sarkozy are serving their own purposes by including Monti. They may need a third party to help resolve their differences the way a couple may seek a counselor. The risk to the strategy, of course, is that neither Merkel nor Sarkozy control Monti’s “vote”.
Monti’s presence is already changing the debate both internally and externally. Within Italy, Monti is not only pressing for austerity, but also the kind of economic restructuring that will boost Italy’s growth prospects. Thursday (Jan 19), for example, Monti will likely secure his cabinet’s approval for a package of reforms, including liberalizing labor and product markets, which are aimed at boosting Italy’s competitiveness.
Italy is no slouch. Despite the indebtedness and a credit rating by S&P now below Poland, Italy has an economy much stronger (and larger) than the other peripherals and arguably more competitive that often appreciated.
Consider that according to figures recently cited by the Financial Times, between 2000 and 2010, Italian exports rose 72%, while French exports rose 50% and Germany exports rose an incredible 126%.
If one cuts the time series off at peak in 2008, Italian exports rose 125%, while French exports rose 76% and German exports rose 155%.
Externally, Monti’s presence is just as important if not more so. His is among the first authoritative voices that seek to counter Germany. Specifically, Monti is diplomatically but adamantly pushing Germany to recognize that the creditor nations need to do more.
He is not seeking a hand-out. Instead, Monti understands that the austerity among the debtor nations needs to be offset by more stimulus among the creditors nations, or the backlash that is building with threaten precisely what Germany wants to preserve.
As the monetary union mixed the German steel of the uber-mark with softer alloys, like the Italian lira, Monti is campaigning to soften the German led austerity regime, by emphasizing growth. Both Draghi and Monti seem to recognize the limitations of the German narrative that fiscal profligacy led to the crisis. Both recognize the role played by private sector borrowers and lenders and this has been largely absent from the official debate.
No other leader of a debtor country can do what Monti can. He has Merkel and Sarkozy’s ear. Germany and France may be the pillars of Europe, but Italy is also essential. And the Mario Brothers know it’s no game.