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6. Super Mario
A SPIKED PRUSSIAN MILITARY HELMET , a Pickelhaube, decorates Mario Draghi’s office on the 35th floor of the Eurotower in Frankfurt, the headquarters of the ECB. It was a gift from the editors of Bild, a German tabloid newspaper, intended as both a compliment to his reputation as “the most German” of the candidates to run the central bank (after the resignation of Axel Weber) and a warning to the former Italian central banker not to let down his guard against inflation. As he took charge of the ECB at a time of great peril for the euro zone he had to act boldly, though he knew he could ill-afford to allow austere northerners to accuse him of turning the ECB, the heir to the uncompromising Bundesbank, into a European version of the Banca d’Italia.
5. Trichet’s test
OF THE SENIOR FIGURES IN THE EURO ZONE, it was Jean-Claude Trichet, president of the European Central Bank, who gave the clearest warnings of the danger of growing deficits. He was a hawk about respecting the stability and growth pact. Moreover, from 2005, he would turn up every month at ministerial meetings with charts setting out his concerns about economic imbalances. A favourite one showed the divergence in unit labour costs across the euro zone. Another tracked the giddy rise of public-sector wages. His main concern was that the loss of competitiveness would harm growth. But he also knew the euro zone was not a federal country; there was no central budget to help countries that got into trouble. The countries of the euro zone, he would say, were like La Cigale et la Fourmi,Jean de la Fontaine’s fable about the improvident cicada and the hard-working ant. Those in the periphery sang in the warm sunshine, while the industrious Germans held down their wages and put money aside for a rainy day. But when winter came, Trichet could scarcely stand aside. Central banks wield the power of financial alchemy, able to produce an endless quantity of money out of thin air.
4. Build-up to a crisis
IF THERE IS AN ORIGINAL SIN in the creation of the euro, it is, for many in Berlin and Brussels, the breach of the stability and growth pact in 2003. Germany and France colluded to block any official rebuke or sanctions for letting their budget deficits rise above the Maastricht ceiling of 3% of GDP. After a battle with the European Commission that ended up at the European Court of Justice, they negotiated a looser version of the pact in 2005 that, to critics, rendered it toothless. From then on, so the story goes, all semblance of fiscal discipline was abandoned. Today’s German ministers castigate their predecessors for leading the euro zone into sin rather than virtue. Yet this account offers at best only a partial explanation of what went wrong.
3. How it all works
THE EUROPEAN PROJECT (and thus the euro) suffers both from a lack of clarity over its precise nature and end-point and from the dull complexity of its institutional structure. Like a pantomime horse, it has long had a dual character, reflecting an initial compromise between those countries wanting a United States of Europe and those preferring a club of nation-states. Thus it has federalist elements such as the European Commission, a (now directly elected) European Parliament, a European Court of Justice and a European Central Bank. But it also has strong inter-governmental bodies: the Council of Ministers, representing national governments, and the European Council of heads of state and government. An important force throughout the euro crisis has been the tension between those preferring federal answers (often called the “community” method) and those favouring intergovernmental solutions (sometimes referred to as the “union” method).1