Has Mario Draghi, finally, saved the world?
It's been like an old friend to me. Its dramas, its machinations, its technicalities. Its politics, its economics, its laugh-out-loud craziness. We have had the obstinacy of the Germans, the arrogance of the British and the downright despair of the Greeks. For me, it has been endlessly fascinating.
Fiddling while Europe burned
But maybe, just maybe, we are seeing a light at the end of the tunnel, and an end to all this madness. I should be glad, I know, yet I feel a sense of melancholy. Yes, eurozone crisis, I will miss you when you're gone.
In October of last year, I asked whether Mario Draghi was the man who could save Europe. At the time, Europe was mired in the depths of crisis. Bond yields in Italy and Spain were reaching unaffordable levels, Greece was on the brink of financial and social collapse, and yet it looked like Europe's leaders were fiddling while the continent was burning.
A sheep in wolf's clothing
Enter, stage left, an unassuming banker, smartly turned out in navy blue suit and black tie, with gold-rimmed spectacles and a slight glint in his eye: his name was Mario Draghi.
An alumnus of the World Bank and Goldman Sachs (NYSE: GS.US), he had the credentials of a monetary policy hawk -- so much so that commentators dubbed him, with more than a hint of seriousness, 'Herr Draghi'. Yes, this was an Italian who was, irony of ironies, more German than the Germans.
Many assumed that Draghi would be at the beck and call of the Bundesbank, and that Europe's doves, who were pleading for quantitative easing and a relaxation of the European Central Bank's monetary policy, would be disappointed again.
But, I think Draghi's initial hawkishness was no more than an opening gambit in the long game that he has been playing. Really, he was no more than a sheep in wolf's clothing. And what was the name of that game? 'Draghi vs the Germans'.
Draghi vs the Germans
Finding a solution to the eurozone crisis might seem fiendishly complicated, but it is really quite simple. Imbalances in competitiveness between the eurozone's countries have led to severe imbalances in the sovereign bond market. The result is that Greek, Spanish and Italian bonds have sky-high yields, while German bonds yield close to zero.
How do we solve this problem? Easy! Just print lots and lots of money, and use that money to buy the bonds of countries such as Spain and Italy. And keep on doing it -- relentlessly.
The law of supply and demand means that this tactic will rapidly lower bond yields. This is the key reason why the US, which is actually more indebted than Europe, can easily service its debts. In one fell swoop, the crisis is ended.
So why hasn't Europe done this before? Because the Bundesbank has blocked it. Quite simply, the Germans have made themselves prisoners of the past -- a past where unbridalled money printing has led to rampant inflation, economic collapse and, ultimately, the horrors of war.
Controlling inflation at all costs has been the watchword of post-war Germany and, many would argue, the key to its economic success. But things are different now: inflation is no longer the great danger it once was, but the Bundesbank remains wedded to the past.
Crossing the Rubicon
Until now. Mario Draghi has finally been able to persuade Angela Merkel to allow bond buying by the European Central Bank, though admittedly with conditions. The Rubicon has been crossed.
Let's hope that this works. If it does, the Germans may relax, and allow the programme of bond-buying to be extended. The eurozone crisis might finally be near its end. Of course, this does not change the fact that Europe's economies are severely damaged. But it would at least give them time to heal. And this might just be a once-in-a-lifetime opportunity to buy up shares in European companies such as BMW, France Telecom (NYSE: FTE.US), Siemens AG (NYSE: SI.US) and Total SA (NYSE: TOT.US).
Of course, I could be wrong. Germany's senior court may still rule that the eurozone rescue is unconstitutional. The Bundesbank might still throw its toys out of the pram. The agony might be prolonged. But, for the sake of the world's economy, as well as your portfolio and my portfolio, let's hope not.
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> Prabhat owns none of the shares mentioned in the article.
