The Alchemists: Three Central Bankers and a World on Fire

by Neil Irwin

  King and Bernanke turned again and again to a relatively narrow set of policies, seemingly reluctant to adopt any that might rewrite the rulebook. Only they and their deities know whether that was because they knew from analysis that more unconventional moves would fail, whether they were constrained by the committees they led, or whether they were driven by a fear of political blowback. There were bolder, riskier tools out there. But in 2012, Bernanke and King held back, hoping that Mario Draghi and company could resolve the eurozone crisis and eliminate its downward pressure on the U.S. and UK economies. If so, there might be no need for yet more risky, unproven actions.

  At King’s May 2012 press conference, Ed Conway of Sky News noted that the governor had been pushing European officials to respond more resolutely to their crisis for “years and years.” “Is it frustrating that no one seems to be listening,” Conway asked, “even when you are kind of shouting from the rooftops about this particular crisis?”

  “I have,” acknowledged King, who seemed almost resigned to the fact that the future of the British economy was outside his control. “I will do no more shouting. I will simply rest where I’ve made that point; others now have to respond.”

  NINETEEN

  Super Mario World

  Panagiotis Roumeliotis sat down for lunch in the cafeteria of the International Monetary Fund, a few blocks from the White House in Washington. Roumeliotis was Greece’s representative to the IMF, no easy task in the final weeks of 2011. But as one of his country’s elder statesmen, he was happy to do the job. His cell phone rang. On the line was George Papandreou. “We need you to come to Athens immediately,” the embattled prime minister said. “We would like for you to become prime minister.”

  Papandreou’s position had become untenable. His party, the Panhellenic Socialist Movement, held only a narrow majority in parliament and was losing confidence in a prime minister who’d overseen the nation’s descent into depression. Papandreou was in talks with the opposition conservative party, New Democracy, about forming a coalition or “unity” government—to join together to select a nonpartisan technocrat to be his successor as prime minister, someone who could lead Greece through all the unpleasant reforms being demanded by international creditors, then be replaced in a new election down the road.

  Roumeliotis called his wife. She was none too pleased by her husband’s promotion: “There is no way you can do that! They will kill you!” she said. To Roumeliotis, though, the risk of something awful happening—and just being prime minister of a nation on the verge of economic and political collapse would be awful in its own way—was one he had to take for the sake of his troubled country. He packed his things and made it to Dulles International Airport in time for a 4 p.m. flight to Frankfurt, then on to Athens.

  By the time he arrived, however, New Democracy leader Antonis Samaras had apparently changed his mind about Roumeliotis’s suitability. It just wouldn’t do, Samaras had decided, to have somebody associated with the much-hated IMF as prime minister—even if Roumeliotis had been there representing the Greek government, not working for the fund itself.

  So Papandreou kept looking. He next called Lucas Papademos, a retired Greek economist and visiting professor of public policy at Harvard. Papademos, ironically, had until recently been a senior official of another troika member: He was vice president of the European Central Bank until 2010. But for whatever reason, the ECB didn’t attract quite the populist ire that the IMF did, so Papademos was viewed as a more politically palatable choice. Two days later, Papandreou resigned and Papademos was set to try to lead his nation away from the abyss.

  This strange sequence of events is emblematic of how the most consequential decisions imaginable were being made on the fly as European leaders tried to redirect their flailing crisis response at the start of November 2011. Conveniently, Papademos was already in Europe when his name was called, so he didn’t have to cross the Atlantic the way Roumeliotis did. He was scheduled to appear together in a panel discussion in Frankfurt with Mario Monti, another retired wise man of Europe. Both had to cancel: On November 11, Papademos became prime minister of Greece, and on November 12, Monti was named prime minister of Italy. Jean-Claude Trichet had retired less than two weeks earlier, and Spanish prime minister José Luis Zapatero was set to fall on November 20.

  The cast of characters was fast changing in Europe’s crisis at a time when Europe desperately needed a fresh start. The question was, could the new team get a new result?

  When Mario Draghi took over as ECB president on November 1, there was no time for ceremony. Jean-Claude Trichet moved out of the airy thirty-fifth-floor office he had occupied for eight years and Draghi moved in, without even setting up any personal effects. The day he took office was one of the ugliest on global markets in recent memory. The stock prices of European banks plummeted, with shares of French giant Société Générale falling a stunning 16 percent. Yields on Spanish and Italian debt stayed relatively contained—but only because of massive bond purchases by the ECB. As the Guardian put it, only somewhat unfairly, “Mario Draghi’s first day at work as the head of the ECB was spent buying up unseemly quantities of his own country’s debt.”

  The day before, Papandreou, reeling under the pressure of trying to lead an increasingly dysfunctional nation with the narrowest of majorities in parliament, had announced a bold gambit: He would hold a referendum, asking Greek voters to decide whether to accept the measures required of them as a condition of their bailout—and, implicitly, whether to keep the euro as their currency and remain in the European Union. If they voted yes, Papandreou would be newly empowered to do what had to be done. If they voted no, the country would surely default on its debt and likely spiral into economic chaos. To Papandreou, it was a way to force the issue and end the muddling through. To essentially every other European leader, it was a reckless and desperate measure. As one European diplomat put it to the Financial Times, it was “the political equivalent of smashing rare and expensive plates at a restaurant when one is happy. The meaning of this eludes everyone.”

  As the confusion generated by Papandreou’s announcement spread, Draghi led his first meeting of the ECB’s Governing Council on November 3. His style was different from that of his predecessor. He was less tolerant of long-winded soliloquies by council members, preferring crisp, focused debates. “The meetings are very well targeted. Rather than philosophizing about things, it’s rather concise and analytical,” said one person who was in meetings with both men. Trichet, of course, could turn long-windedness to his advantage, using the ticking clock to ensure he got his way; every minute one council member spent explaining his reasoning in detail was a minute that couldn’t be used to push the discussion away from where Trichet wanted it to go. And Trichet started meetings by laying out his own view and preferred policy choice, putting implicit pressure on the other twenty-two participants to agree—or at least prepare to be on the defensive should they disagree.

  In a change that neatly parallels the one that took place at the Federal Reserve when Ben Bernanke succeeded Alan Greenspan in 2006, Draghi reversed the sequence. He allowed his colleagues each to speak their views first. He then summed up the range of perspectives and set forth his own opinion—in this case, that there was compelling evidence that the eurozone economy was sliding into a new recession, that this would inevitably put downward pressure on prices, and that the ECB should cut interest rates to try to bolster growth on the continent.

  Draghi stood before the media in the Eurotower that Thursday afternoon, as Trichet had for the ninety-six months previous, and explained that after his first monetary policy meeting as president, the ECB was cutting target interest rates by a quarter percentage point. After his second meeting, the bank did the same. The two actions reversed Trichet’s rate hikes from April and July, which looked even more misguided in hindsight than they had to critics at the time. Although a range of surveys and projections pointed to Europe’s bein
g in or near a recession at the time—by this point, the economic evidence was overwhelming—it was nonetheless a bold move for Draghi. The Italian essentially cast aside any fears of looking weak on inflation to Germans who were skeptical of him because of his nationality, and he took decisive, well-reasoned action. It was an early sign of self-confident leadership from the new ECB president.

  • • •

  The slogan France chose for the gathering of the Group of 20 heads of state that year was Nouveau monde, nouvelles idées: “New world, new ideas.” But as the most powerful men and women on earth descended on the south of France for the two-day summit, their agenda would be usurped by old problems in an ancient center of the Old World.

  The G20 had emerged as the preeminent vehicle for coordinating global policy in the depths of the 2008 crisis, as it became clearer to the United States and the great powers of Europe that it would no longer do to discuss global problems only among themselves. The rising powers of the developing world—in particular, China, Brazil, and India—needed to have a seat at the table if world leaders were to truly address their common challenges collectively.

  The core idea is indisputable. But the G20, which includes all of the world’s major economic powers, as well as some smaller ones that serve as de facto representatives for a region (South Africa for sub-Saharan Africa, for example, and Saudi Arabia for the Middle East) is in reality an unwieldy, indecisive group. Once those twenty heads of state and their respective finance ministers, staffers, and translators sit down with the various other invitees—the secretary-general of the United Nations, the managing director of the IMF, and so on—the whole thing becomes a sometimes grueling exercise in diplomacy for show. The joint communiqués released at the end of the meetings charting a common course for the world tend to be as vague as possible. How could it be otherwise when they must be unanimously approved by a group of nations with such disparate interests?

  The 2011 gathering in Cannes was even more grueling than most. It poured rain for almost the entirety of the summit. And some of the diplomacy, no matter how much it was undertaken for the greater global good, seemed akin to bullying, with representatives of the world’s economic superpowers leaning on their counterparts from the hapless GIPSIs. Although Greece wasn’t an official participant, Sarkozy, German chancellor Angela Merkel, and other members of the Groupe de Francfort summoned Papandreou to Cannes the evening before the G20 was to formally begin and gave him an ultimatum: If you insist on having a referendum, it must be on the larger question of whether Greece is to remain in the eurozone. “The referendum in essence is about nothing else but the question, does Greece want to stay in the euro zone, yes or no?” Merkel reportedly said over a dinner where, as Der Spiegel put it, “the food was excellent, clearly the product of a gourmet chef. But the conversation was more on the level of a street corner eatery.”

  Moreover, they made clear, the next €8 billion in aid wouldn’t be dispensed until either the vote was in favor of remaining in the eurozone or the referendum was canceled. “We made Papandreou . . . aware of the fact that his behavior is disloyal,” said Eurogroup chief Jean-Claude Juncker later. Papandreou returned to Athens the next morning and embarked on the new strategy of discussing with New Democracy’s Antonis Samaras a coalition government between Greece’s center-left and center-right parties, led by a technically accomplished but nonpartisan elder statesman. “Papandreou became the punching bag for everything bad in Greek society,” said a senior Greek official. “He had honest intentions of navigating the country through a difficult program, but he did not have the skills to convincingly defend it, and he appeared out of touch. What happened in Cannes was humiliating for Greece and for him personally.”

  United States president Barack Obama was nearly as assertive as Sarkozy and Merkel, shuttling from one closed-door meeting to another at the Palais des Festivals et des Congrès, more commonly the scene of movie-star schmoozing than high-stakes negotiation. Obama, taking a page from the role that Tim Geithner and his international affairs undersecretary Lael Brainard had often played through the European crisis, aimed to act as a catalyst, an outside source of pressure for decisive action by eurozone authorities. The evening of November 3, the same long day on which Papandreou had reversed course on his referendum and Draghi had cut interest rates, Obama and top Europeans officials gathered to put pressure on Italian prime minister Silvio Berlusconi. They caught him by surprise, almost ganging up on him for coming to Cannes without a credible plan for getting his nation’s finances under control.

  What the Italian prime minister agreed to on that rainy night—IMF monitoring of his country’s economic management—was technically voluntary. But it came after hours of browbeating. “It amounted to the final stage of the ‘waterboarding’ sessions to which Berlusconi had been treated in the last months by his partners and by the markets,” Italian journalist Carlo Bastasin wrote. “The old leader, who believed himself to be the best Italian political leader ever and one of the most authoritative in the world, was not even able to reply . . . and felt like he had fallen into an ambush.”

  Italy was one step closer to the kind of intrusive oversight endured by Greece and the other countries where representatives of the troika were installed. And while it was technically Berlusconi’s choice to accede to IMF oversight, he did so under an implicit threat: If he refused, the international community’s willingness to help Italy through its times of trouble would evaporate. Berlusconi’s ability to rally his parliament to his side was already waning, and his credibility with international leaders was nonexistent. Although irrelevant to his country’s economic situation, his apparent leering at the backside of Argentinian president Cristina Fernández de Kirchner during an official photo shoot surely didn’t help his standing among Merkel and other European leaders.

  As the Cannes gathering wound down, the conventional wisdom was that it had been a disaster. While the national leaders had been driven everywhere, their staffers had to walk or take shuttles from hotels, inevitably ending up soaked anywhere their umbrellas didn’t cover. It was a wet, dreary gathering at a time when the world’s economic prospects looked equally dreary. There was no progress on the longer-term goals of creating a more durable world economy. But that doesn’t mean there was no progress. Both Greece and Italy were set on course to bring in new leaders who would be more credible than those they replaced. More important still, at a time when European leaders had started to chafe at American and British officials repeatedly urging them to act, new voices were emerging. Over and over, the other national leaders around the table, from all points on the globe, were applying the same sort of pressure that had become old hat from Obama and British prime minister David Cameron.

  The leaders of Brazil, Australia, and any number of other countries blamed Europe for their own economic weakness. Chinese head of government Hu Jintao was particularly assertive, suggesting that his nation wouldn’t deploy its massive cash reserves to help Europe until the continent had a credible plan to help itself.

  If Merkel, Sarkozy, and Draghi ever had any doubts that the world was waiting for them to move, they knew better now.

  The following week, the talks that led to Papademos and Monti taking over from Papandreou and Berlusconi came to a head. Some reports portrayed those appointments as having been made effectively in Frankfurt, Brussels, and Berlin instead of Athens and Rome, suggesting that the ECB, the European Commission, and the German government were dictating to those countries who could lead them. It was subtler than that. Well-placed sources in Greece and Italy said that they didn’t receive any specific instructions from European authorities as to who would be an acceptable prime minister. Nor did outsiders meddle in the details of the selection process. But at the same time, the party leaders negotiating over who would succeed Papandreou and Berlusconi did so knowing that the whole point was to put in place a leader who could negotiate credibly with the troika and the other European go
vernments.

  More concretely, markets were putting more pressure on Italian government leaders than Angela Merkel ever could: Ten-year borrowing costs for Italy started October at below 5 percent. By November 9, just before Berlusconi’s resignation, they reached 6.56 percent. If sustained, rates that high would be enough to render the country insolvent. That spike reflected the influence of Draghi and the ECB: In the week ending November 11, the central bank bought only €3 billion in bonds, compared with €10 billion the previous week. Less ECB buying meant higher rates, which meant more pressure on members of the Italian parliament to dump Berlusconi as their leader. Draghi didn’t have to tell the Italian government what to do; the ECB’s decision to buy bonds, or not, did it for him.

  The appointment of Monti as prime minister of the eurozone’s third largest economy gave instant credibility to a country that had been less influential than its size would suggest during negotiations among European leaders, simply because Merkel and Sarkozy didn’t particularly respect Berlusconi. With Monti in place, Italy was poised to join France as a counterweight to German sway over Europe. Within two weeks, there were two Italians with significant influence over the course of the eurozone crisis where before there had been none: Monti and Draghi—the Super Mario Brothers, as the press gleefully nicknamed them.

  An overwhelming victory for Mariano Rajoy’s center-right People’s Party in Spanish elections on November 20 completed the sweep: The crisis had now brought down the prime ministers of all five GIPSI countries.

  • • •

  They served white wine from the Pfalz region of Germany, just west of Frankfurt, when the leading bankers of Europe came to lunch with Draghi on a Wednesday not long after he took office. As his guests sipped, they offered more than polite comments on the local viticulture—they offered the germ of a plan that could help quell the panic that had enveloped Europe and the world.