The twin leadership

Merkel and Draghi: an oddly well-assorted couple. Similar styles and mutual respect even when at loggerheads. An archetype of future leaderships?


Never judge by appearances when dealing with a central banker. Or, for that matter, when assessing a head of state engaged in a notable about-face. Especially when the banker and leader in question are Mario Draghi and Angela Merkel.

Draghi, the president of the European Central Bank (ECB), has proven by now that when it comes to guiding the decisions of the ECB’s Governing Council, he has an amazing capacity for political juggling. Even when faced with opposition and public criticism by the Bundesbank and its president, Jens Weidmann. While Draghi’s intentions regarding monetary policy are clear – even where forward guidance of markets is concerned – the paths he weaves in order to garner internal and external consensus are dictated by his strategies and tactics, which tend to be a little less explicit.

The German chancellor, unaccustomed to grand gestures or statements of principle she might later regret, has always made her moves without offering any kind of long-term forward guidance for her choices. Even more so recently she has set aside her one-step-at-a-time policy and has propelled Germany into an increasingly larger role as a world leader in international affairs. The result is that when assessing the relationship between Draghi and Merkel, nothing can be taken for granted.

The divergence between ECB policies and Germany’s monetary orthodoxy is plain for all to see. The latter is founded on a concept of financial stability overseen by the Bundesbank – to which Germans assign an almost oracular power – as well as interests and modus operandi that are typically German. Such as the need to have a remunerated savings system with interest rates that are not too low so that they can guarantee appropriate returns on investments for a country that is aging fast, and the safety of a strong currency that forces businesses to increase efficiency.

The ECB, on the other hand, is currently engaged in a €1.1 billion quantitative easing programme that should, thanks to low interest rates and injections of capital into the economy, offset the danger of long-term deflation and stimulate the recovery of the eurozone’s economy.

With this kind of divergence, one would expect Merkel to oppose the ECB’s choices. And there’s no doubt that, in her reading of the euro crisis, the chancellor and the German establishment are closer to Weidmann’s outlook than to Draghi’s. Yet German opposition to the purchase of €1.1 billion in equity by the ECB has not materialised.

Merkel in a January speech in Frankfurt, with Draghi in attendance, only warned the eurozone governments not to take advantage of the cash flow supplied by the central bank and subsequently halt structural reforms that all the 19 euro countries need. She also acknowledged the independence of the ECB’s decisions. Much as she had done, even more forcefully, in the summer of 2012 when she effectively gave Draghi the political green light to pronounce the famed “whatever it takes” in defence of euro unity.

This is a sign of respect for the independence of Frankfurt’s central bank, fair enough. But that’s not all. At this moment in time, Draghi’s monetary policy probably does not displease Merkel and Germany’s Minister of Finance Wolfgang Schäuble.

The ECB’s enormous monetary stimulus greatly relieves the pressure that the other European countries, as well as the United States, have been placing on Berlin for it to adopt more expansive economic policies at home and more accommodating ones in Europe. Schäuble will probably take a step in this direction through major investments in German infrastructure, for example, though no doubt in his own time.

The fact of the matter, however, is that the vastly expansionist manoeuvre by the ECB enables Berlin to steer a path towards a balanced government budget even though there are many that would like to see it spending more. After all, as Berlin’s Ministry of Finance points out, German growth at present is driven more by internal consumption than exports, therefore additional budget stimuli would be unjustifiable. Without beating about the bush, Draghi is doing the dirty work that Merkel and Schäuble would rather not do, and when all’s said and done, the chancellor is quite relieved by this. Merkel and Draghi meet rather often in Berlin for informal informative discussions, according to their spokespersons. Though there’s probably more than meets the eye, they at least are both confirming their respective room for political manoeuvring. Both showed a great capacity for leadership at the time of the ECB’s announcement of the quantitative easing operation: Draghi by heading down the path he had intended to, Chancellor Merkel by keeping quiet and thus ensuring that the rest of the eurozone remain united (working towards unity among Europeans should be any leader's main priority).

This two-handed leadership of Europe was probably made possible because Draghi and Merkel speak to each other and are aware of the limitations they each have to deal with at any given time. So far, then, the relationship is a virtuous one.

This is how things stand today. It may not stay that way. There are many doubts about the European quantitative easing programmes in German political, financial and intellectual quarters. Not only because they remove an incentive that can force governments to carry out reform, a concept that is constantly being reiterated, but also because many believe, as Weidmann claims, that already by January the economic situation no longer warranted such forceful action.

The recent improvement of growth expectations in the eurozone reinforces this point of view. In the long run, a good number of economists expect that due to the weaker euro exchange rates, the drop in oil prices and the ECB’s unconventional monetary policy, the German economy might start overheating (though it needn’t necessarily get out of control). If these tendencies should reinforce opposition to quantitative easing among German society, leading to a request to end it sooner than expected (September 2016), even Berlin’s government could suffer from widespread ill will. Furthermore, the Greek crisis is still breeding tensions. And seeing as both the ECB and Germany are on the front line in these negotiations, this kind of stand could lead to unforeseen repercussions even for them.

The thought of seeing Draghi and Merkel engaged in a public clash, however, looks unlikely. It is not in their political natures, and so far they’ve seen that their implicit collaboration works. During the internal eurozone crisis, it has provided a twin leadership that has held all the countries and European institutions together, so there’s no reason to do away with it. On the contrary, Merkel is engaged on many other fronts and would probably be happy to have a Draghi by her side even – hypothetically – when speaking to the Kremlin.