Draghi may reach for Bundesbank manual

Mario Draghi may reach for the German policy manual when he takes the helm of
the European Central Bank.

Draghi, 63, will on Nov. 1 inherit an ECB
that’s almost unrecognizable from the one Jean-Claude Trichet took charge of
eight years ago. The bank’s balance sheet has more than doubled to 1.9 trillion
euros ($2.7 trillion), mostly as a result of the extraordinary measures it used
to battle the global financial crisis and now Europe’s sovereign debt woes.

German Chancellor Angela Merkel’s
endorsement of Draghi yesterday means it will fall to an Italian to steer the
ECB out of a crisis triggered by southern European fiscal profligacy. Merkel
made clear she’s backing the Bank of Italy overnor in
the expectation he will subscribe to the tight-money tradition of the
Bundesbank, which provided the blueprint for the ECB when it was created 1998.

“Draghi will have to make a huge effort to
assert his hawkish credentials,” said James Nixon, an economist
at Societe Generale in London and a former ECB forecaster. “He may have to contend with the very
real threat of a sovereign restructuring. Persuading the Germans that an
Italian is the best man for that particular task is going to be difficult.”

Under Trichet, the ECB flooded markets with
cheap cash and bought government bonds to prop up banks from Greece to Ireland and prevent a sovereign
default. Draghi must eventually withdraw those measures to assuage fears of
inflation, even as Greece struggles to repair its finances.