ECB’s Draghi…calm in the face of a storm

US, Brussels sources question Merkel’s survival without policy change

The Slog has learned from sources in Frankfurt, Switzerland, Brussels and Washington that the head of Europe’s Central Bank (ECB) Mario Draghi is now “in a position to pursue full-scale QE, and will do so”, following deft political moves on the part of the Italian in recent weeks.

The Slog has been watching Mario Draghi’s performance in the chess-game between Berlin and the European Central Bank with some admiration since he took over. I don’t approve of what he’s doing, but you have to admire the bloke’s skill.

I reported two days ago on anger in Berlin following the ‘consensus’ appointment of Belgian Peter Traet to the role of Chief Economist – rather than replacing Jurgen Stark with another German. Now Mario is showing the strength of support he has on the ECB Council by eking a pro-Sovereign-bailout message out of another German ECB Chief.

European Central Bank Governing Council member Klaas Knot opined that Berlin should support a major increase in the proposed ESM, still currently the EFSF until April/June/August or never, depending on who you talk to.

“The most important obstacle lies in Germany, not in the Netherlands,” Knot said in an interview on Dutch public television last night. “I think that more money is needed and we will use the time to convince our German colleagues. We haven’t moved in the right direction and it’s also clear that measures needed are happening too slowly and too limited in size. A significant acceleration in decision-making is needed”.

This is a pretty direct side-swipe at Merkel, and her refusal to up the Stability Fund or deliver a eurobond prior to FiskalUnion.

If push comes to shove, I’m told, Signor Draghi will simply increase the scale of his current, thinly-disguised QE – and take the heat from Berlin on the chin. But his hope is that he can so increase the pressure on Chancellor Merkel – as the situation deteriorates – that the German leader will be forced to relent. He will then, as one informant puts it, “focus on funnelling every last red cent the banks need to weather the coming storm”.

The Slog’s favourite Bankfurt mole is of the exact same opinion. “Draghi is running rings round Merkel,” he told me last night, “and forcing Berlin into a corner. This man is a talented strategist, for sure. Above all, this shows the division between Brussels and ECB fiscal thinking on the one hand, and Berlin. But you also have the split between the risk-aversion of my colleagues here in general, and the seeming willingness of the Merkel leadership to go for euro survival by steaming ahead towards centralised fiscal discipline.”

The complexity of the politics is confirmed by a State Department source in Washington. But this American goes further:

“Mario Draghi has to think about US, French, German, Greek, Italian and German banking sensitivities more than ever right now,” said the informant, “Our guess [he refers to a section, not the whole of State] is that he risks destabilising Merkel’s position to the point where legislative maneouvres and voter sentiment in Germany end up kicking her out. That’s the last thing we want”.

I think Washington could be overstating the danger to Angela Merkel: I’ve maintained for some months that her survival is central to US foreign policy on Europe, and the Americans are moving to cement any financial alliance they can with Germany. But a mole in Brussels offers this time-worn view:

“Remember that the gameplan here is to keep Germany in the cage – it is the Commission’s chief raison d’etre. There is no doubt that machinations both here and in Paris are at work destabilising Merkel – with the objective of, at worst, bending her will on bailout and stimulation. Berlin is seen increasingly as blind to reality, while the French remain terrified of Greek and Italian default.”

Yesterday, Sean Darby, global head of equity strategy at Jefferies Group Inc., talked from Hong Kong about the next moves in the eurozone on Bloomberg TV. The gist of his view was that Draghi’s ECB would “pile in with upweighted QE at some in the first [2012] half”. This suggests to me that Mario’s intentions are being still more widely leaked.

Stay tuned: this one will accelerate towards a conflict quite quickly from here on.