Who will save the euro after Mario Draghi has 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.

Mario Draghi © FREDERICK FLORIN/AFP/Getty Images

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

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

Advertisement - Article continues below

A clueless successor

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.




The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

Welcome to Currency Corner – your weekly guide to the world’s biggest market

Forex is by far and away the biggest market in the world, with an average daily trading volume of over $5trn per day. Here, Dominic Frisby looks at th…
3 May 2019
EU Economy

The European Central Bank throws away the rulebook to bail out Italy

The ECB has removed all constraints on asset purchases and will now buy “whatever it takes” to tackle the coronavirus. John Stepek explains what it me…
26 Mar 2020

Most Popular


Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020

Has the stockmarket hit rock bottom yet?

The world's stockmarkets continue on their wild and disorientating rollercoaster ride. Investors are still gripped by fear. So, asks John Stepek, have…
2 Apr 2020
Small business

Furlough: what does it mean and how does it affect me?

Many companies have “furloughed” employees after they have shut down because of the coronavirus. But what does furlough mean and how does the scheme w…
30 Mar 2020