Who will save the euro after Mario Draghi has gone?

You don’t know what you’ve got till it’s gone
Mario Draghi – a safe pair of hands at the ECB – is succeeded by Christine Lagarde, a lawyer who thought Argentina good for a loan.
As Joni Mitchell so memorably put it, sometimes you don’t know what you’ve got till it’s gone. Next week Mario Draghi, head of the European Central Bank (ECB), will hand over the presidency to his successor, former International Monetary Fund (IMF) managing director and French finance minister Christine Lagarde. That might just look like one technocrat handing over to another. But it might have serious and worrying consequences for investors.

Stepping into a storm
When Draghi (pictured) took office, the euro crisis was just starting. Greece was running out of money. Ireland had already had to be bailed out to fix its banking crisis. Portugal was not far behind, and Italy and Spain were teetering on the edge of financial collapse. The bond markets were refusing to fund national governments and the euro at times looked close to collapse. The new president was stepping into a storm.
Draghi’s record and legacy might look like nothing special. After close on a decade, he printed over two trillion euros of new money, chucked it at the banking system and only managed to generate a tepid recovery. Slashing interest rates to zero and taking some key rates into negative territory hasn’t helped much either. The ECB has not been able to create the kind of sustained recovery from the financial crash seen in the US and to a lesser extent in the UK. Instead, it has slowly turned into the new Japan. There is not much in that record to brag about.
Except for this: it could have been a lot, lot worse. Draghi steered the eurozone through a crisis that took it to the edge of a break-up. His success was by no means inevitable. With his now famous promise to do “whatever it takes” to ensure the survival of the single currency, he tore up the rule book and started the process of turning the ECB into an activist central bank. Many people assumed it couldn’t print money or intervene in the markets to rescue over-spending governments (after all, the treaties do seem to rule that out), but Draghi went ahead and did it anyway.
He wasn’t shy of intervening in national politics when he had to either. It was the ECB’s decision to turn off the cash machines that bought the Greeks into line and when Italian prime minister Silvio Berlusconi made noises about leaving the euro, Draghi made sure the bond markets quickly changed his mind. Draghi turned the ECB into the only European institution with the power to shape events rather than just react to them.
A clueless successor
It is unlikely his successor will be anything like as good. Indeed, Lagarde’s record shows she will stick to a rigid consensus, seeking compromises instead of solutions even if another crisis hits. Unlike Draghi, she is a lawyer by training, not an economist. As France’s finance minister she presided over a huge budget deficit and squandered the opportunity for reform that then-president Nicolas Sarkozy briefly opened up. Another decade of stagnation was the result. At the IMF, she colluded in policies that created the worst depression in recorded history in Greece and then led the IMF’s largest ever rescue package in Argentina, which promptly led to another default and a fresh crisis in that country.
At the ECB she is likely to broker compromises and keep her political masters on board, but will ignore what is happening to the economy and tune out warning signs from the markets. Much as it did in Argentina, that may well lead to disaster. She’s unlikely to show any of the flexibility or creativity that allowed Draghi to get ahead of events and bring the markets under control. If there is a recession and a fresh euro crisis during her term it is hard to feel confident she will be able to manage her way through it. A break-up of the euro will be messy, pricey and traumatic. Banks will go down, unemployment will soar, firms will go out of business and equity markets will crash. Without Draghi in charge and with the clueless Lagarde taking over, that is a lot more likely. At some point the markets are going to miss having the man who saved the euro in charge of the ECB.

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