Merkel Is Leaving and Macron Is Flailing, But the EU Has a New Heavyweight in Draghi

One thing European leaders always knew about Mario Draghi was he’d never lose his cool.

When European Commission President Jean-Claude Juncker gathered senior policy makers on the 13th floor of the Berlaymont building in Brussels to thrash out details of the third Greek bailout in June 2015, some were expecting trouble from Finance Minister Yanis Varoufakis.

But as Juncker worked line-by-line through proposed tax changes with a small group including Alexis Tsipras, the Greek prime minister, Varoufakis was engrossed in debate with Draghi at the other end of the room, according to two people who were present. At 3 a.m., the anti-capitalist firebrand and the head of the European Central Bank were debating GDP deflators and macroeconomic policy dilemmas from the 1930s like a pair of academics.

Three days later, Draghi shut off emergency liquidity to Greece and Tsipras eventually signed up to a version of the deal agreed that night.

Merkel Is Leaving and Macron Is Flailing, But the EU Has a New Heavyweight in Draghi

This episode serves as a reminder of the qualities the 73-year-old veteran brings to the table. He's calm, ruthless and completely on top of the brief. On Thursday, Draghi will participate in his first much-anticipated EU summit as Italian prime minister.

Draghi is not your typical central banker, according to a senior EU official who dealt with him first hand during his eight years at the helm of the ECB, and he is no ordinary technocrat. He is highly political and understands how to wield power, the official said. His return to the leaders’ council marks the arrival of a heavyweight who is respected across the EU’s political and geographical divides.

“Draghi's authority, his confidence with European and world leaders, and his granular knowledge of procedures and institutions will definitely be consequential,” says Filippo Sensi, an Italian lawmaker who worked as a spokesman for two of Draghi’s predecessors.

During his time at the ECB, Draghi was one of the few outsiders who would prompt leaders to look up from their phones and listen when he entered the room, remembers one former prime minister. The central bank chief’s presentation would often open the summit discussion and, as the first to speak, he would shape the debate that followed, a senior official said.

He could spur leaders to action by describing even the gravest scenarios in a concise, sharp and factual way, one senior official said, while several other diplomats recalled that he remained cold blooded and composed in the tensest moments.

His premiership comes with German Chancellor Angela Merkel preparing to step aside, French President Emmanuel Macron facing a difficult election next year and the EU as a whole shaken by the trauma of the Covid-19 pandemic.

Senior officials have high hopes for Draghi and believe he is uniquely positioned to drive change at home and in Brussels. But one summit veteran said he was worried that expectations fail to take account of how the complex domestic situation could undermine his position and power, and warned there’s a risk of disappointment.

The task of fixing Italy has proved too much for a succession of prime ministers over the past two decades and Draghi has two years at most before another election is due.

“For Italy and for the system as a whole, this is a moment that is very delicate for the EU's future,” Sensi said.

Merkel Is Leaving and Macron Is Flailing, But the EU Has a New Heavyweight in Draghi

Draghi takes office with a wide parliamentary mandate and high polling numbers. Recent figures show about 65% of voters are optimistic about his prospects.

But Italy’s economy had stagnated for years before the pandemic claimed more than 95,000 lives and left public debt approaching 160% of GDP. Draghi's challenge is to use the might of the EU's 750 billion-euro ($910 billion) recovery package to boost long term growth by cutting red tape, helping young people to find good jobs and fixing the logjam in the courts which scares off potential investors.   

Like the EU’s other 26 leaders, Draghi’s immediate priority will be the recovery from the pandemic and getting people vaccinated quickly. Beyond that, he has a chance to complete a strategic plan — and legacy — that he himself mapped out during his time with the ECB in Frankfurt and since

Draghi used to tell leaders that recovery from the financial crisis would involve three legs, a senior official said. The ECB needed to buy time, which it did by buying up government debt. Next the bloc and its institutions had to build fiscal capacity — and the recovery fund is a key step on that path.

Finally, member states have to use that time and those tools to take serious measures to upgrade their economies. In Italy, the most important economy in that process, Draghi now gets to take charge of the overhaul himself.

The prospect of future European integration may hinge on whether he succeeds.

France’s Macron and German Finance Minister Olaf Scholz, an outsider to succeed Merkel as chancellor this year, have both insisted that the recovery fund should be a step toward deeper fiscal integration.

But establishing more permanent fundraising capabilities will effectively depend on the success, or failure, of how Italy spends the 209 billion euros it will receive through the pandemic recovery funds, according to two diplomats from different ends of the continent.

In the eyes of the so-called frugal member states, such as the Netherlands, Draghi has the credibility to make the case for deeper integration, one of the diplomats said. Dutch Prime Minister Mark Rutte and his allies will know that he backs his arguments with facts and not populistic narratives.

If it works, in a few years’ time he may be able to cash in on that trust and push for a more permanent tool, the diplomat went on to suggest. But if he fails, the diplomat said, the consequences will be felt well beyond Italy’s borders.

©2021 Bloomberg L.P.

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