The leaders of Germany, France, Italy and Spain are at the table, each trying to decide how to respond. So are gigantic banks and other global investors. U.S. and British leaders are watching from the side, afraid of what might happen if things go awry.
The stakes on the table: the $16 trillion European economy.
No one knows for sure whether Draghi will hold to his tough line or fold. How open, in other words, could Draghi ultimately be to use the ECB’s power to keep the debt crisis from spiraling out of control if it means undermining the central bank’s political independence and risking inflation? What would it take for him to unleash the ECB and order massive purchases of bonds issued by Italy, Spain and other struggling governments to ensure they can continue to borrow money needed to avoid default?
Close to his vest
Since he became ECB chief, Draghi has been a master of ambiguity, sending conflicting signals — deliberately, many watchers of the ECB believe — about what he and his colleagues are willing to do to prevent Europe’s implosion.
Draghi, 64, headed Italy’s central bank before ascending to the ECB presidency on Nov. 1 as the crisis escalated — particularly in his home country. Italy’s borrowing costs were soaring as investors lost confidence in Rome’s ability to honor its obligations. A flood of data showed that the continent was headed toward recession, which would further aggravate the debt crisis.
Draghi, a dapper, MIT-trained economist with long experience in high-level economic diplomacy, has been willing to use many of the ECB’s tools to address the crisis. He cut the ECB’s main interest rate at his first two policy meetings, easing monetary policy to try to boost ailing European economies, over objections in at least one instance from some of his colleagues.
And he has offered the ECB’s backing to the continent’s banks, offering them unlimited loans in euros for the unprecedented length of three years at a time. He has also joined with top central bankers at the Federal Reserve and elsewhere in restarting a program to make dollars available to European banks that need them.
But those policies are treating the effects of the crisis — a slowing European economy and difficulty for banks seeking funds — and not addressing the more fundamental problems. Central to the crisis is deepening fear among global investors that Italy, Spain and other European governments will be unable to pay off their debts, ultimately leading to a break-up of the 17-nation euro zone.