The following has been in the back of my mind during what now appears to be the whole of last year. In April 2014 Mario Monti gave an interview to Marc Peeperkorn in the Dutch newspaper Volkskrant, p10-13, “The man who saved Europe” (Dutch original: “De man die Europa redde“).
Mario Monti is not to be confused with Mario Draghi – especially where they collaborated on a rather dangerous trick.
Mario Monti was European Commissioner in 1995-2004 and Prime Minister of Italy in 2011-2013. Mario Draghi was Governor of the Bank of Italy in 2005-2011 and is President of the European Central Bank (ECB) since 2011. They performed their trick in 2012.
The trick is explained in the interview:
Monti: “During the European Summit in June 2012 I have used my full negotiation power – including a threat with a veto – to get approval for a seemingly boring paragraph. At four o’clock in the morning it had the signatures of all leaders, including Merkel, my good friend Rutte, and the Finish Prime Minister Katainen, you can say the monetary fire power from Northern Europe.
The paragraph mentioned curtly that countries in the Eurozone who did their homework, like Italy, were ensured of support from the European Central Bank. That statement – at the highest political level – did not impress the markets, since the leaders have authority but no money. A month later ECB-president Draghi came with his famous declaration: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” [verbatim, July 26 2012] That calmed the markets in one single stroke because Draghi has money. Draghi could say that because he had the political support from the leaders. Thanks to me, thanks to my position at the negotiation table. A half year sooner Draghi would have been devoured by the German monetary hawks, saying such a thing.”
Peeperkorn: “Draghi and Monti, thus it was an Italian set-up ?”
Monti (“laughing”): “See it as the Italian contribution to saving of the euro.”
As a trick, it deserves a compliment, and it would be difficult to argue convincingly that the European Summit has been misled in a significant way.
However, the trick comes with a price. This is that structural reform of the euro has not been put on the table.
The Eurozone leadership has been kept in the mental frame of muddling through, while instead it would have been useful to reconsider the monetary mechanism. The current set-up of the euro works like the gold standard, while our economies require the benefits of fiat money.
See my paper “Money as gold versus money as water“.
European leaders are not trained in economics and may not fully understand what has been happening. The two Marios however should understand. My proposal is that they meet again and discuss how their quick fix requires a follow up on structural reform.
Addendum March 29: Ambrose Evans-Pritchard in “Venetian cunning of Draghi-Monti masterplan may save euro for now“ (The Telegraph August 5 2012) states what I tend to agree on:
- “Just to be clear, I do not “support” the Draghi plan. It perpetuates a failed monetary union.”
- “Yet it is churlish to deny that the two Marios have pulled off a feat of statecraft. They have wrested control of the ECB from Gold Standard zealots.”
- “Europe remains a political minefield, but the risk of a global deflationary slump has dropped a notch. Hats off to the Italians.”
However, Evans-Pritchard seems to have no alternative other than a return to national currencies, and my paper suggests that the euro could survive with core national sovereignty provided that each nation adopts its own national Economic Supreme Court.