ECB Chief Mario Draghi may join the hall of fame. His portrait would not hang alongside that of Otmar Emminger, the legendary pioneer of the hard Deutsche mark, but those of Guiseppi Mazzini, Count Cavour and Guiseppe Garibaldi, the founders of modern Italy. His version of Italian nationalism has been a transplant of Francois Mitterrand’s “France in Europe and Europe in France”. In particular, he translated his defiant quip of “doing whatever it takes to save the euro” into a vast monetary transfusion by the ECB for the benefit of mainly Italy. The diplomatic coup of the “Merkel-Draghi” axis made this possible.
Why is there an element of doubt still about Mario Draghi’s success as an Italian nationalist? After all, political pundits in Rome are almost certain that he will become President of Italy following his retirement from the ECB next year. Yet in the euro battlefield the forces of German nationalism and of an Italian nationalism very different from that espoused by Chief Draghi could triumph. Campaign successes to date might be seen in hindsight as setting the stage for his ultimate defeat.
Chief Draghi was in his zenith just last month (April) when he told the ECB press conference that monetary policy had not even been discussed at the just concluded meeting. He did not have to spell out that he had thwarted thereby pressure from the Bundesbank for an early start on monetary normalization. Critics on the German Right, where many view Buba President Weidmann as a “monetary softy” who failed to resist let alone block the ECB’s aggressive pursuance of a 2 per cent inflation target, interpret the boast of the ECB chief as yet another affront.
Targeting inflation has played artfully into Draghi’s mobilization of German savings to re-build bank and sovereign solvency in Italy. The means – negative interest rates and quantitative easing - have come in the guise of euro-monetary tools designed to lift euro-zone inflation from “too low” a level, never mind the Maastricht Treaty stipulated the ECB should aim for stable prices in the long run. All the bigger pity that President Weidmann cannot get monetary policy on to the ECB agenda!
Draghi’s tactical success could turn into defeat. Many German savers, smarting under the negative interest rate regime at a time when domestic prices are rising by 2 per cent per annum, realize that the Bundesbank is monetizing Italian government debt. Whatever coalition government emerges in Rome in coming months (and at time of writing a deal between the Northern League and Five Star appears to be very likely) the parties involved will agree on one thing if nothing else – expanding the budget deficit and thereby the gravy train from Berlin.
No wonder the anti-euro (and anti-immigration) AfD party in Germany is optimistic about crushing the CSU (regional allies of Chancellor Merkel’s CDU party) in Bavaria this October, building on its successes in the 2017 Bundestag elections. Then the CDU/CSU could prepare to repudiate the present coalition with the Social Democrats; by moving to the Right and evoking nostalgia for hard money, these parties would aim to recapture voters from the AfD. The Big Business exporters who support Angela Merkel and thrive on a cheap euro would not approve that shift. But they cannot dictate the CDU’s future against its own electoral advantage.
The next global Crash and Recession might destroy the remains of Draghi’s “Italy in Europe”. A collapse of US interest rates when rates in Europe are stuck at slightly below zero would mean a powerful rise of the euro. The sickly Italian economy could buckle under such currency shock amidst concerns about Italian credit quality. Then the anti-Draghi Italian nationalists who support an exit from the euro and a re-arrangement of Italy’s vast debts to Germany could in combination with the nationalists in Berlin set European monetary trends in a very different and sounder direction.