Inflation dominates headlines across Europe, forcing monetary policy and central bankers onto the centre of the stage. To understand where we are today, in particular in the Eurozone, it is worth looking at paths taken, assumptions made and their consequences. 

Ten years ago two central bankers gave epoch-making addresses. The President of the European Central Bank Mario Draghi, the first Italian to hold the post, spoke in English on 26 July 2012 at a Global Investment Conference in London, a city outside the Eurozone, to his audience, the international financial markets. 

Later that summer, Jens Weidmann, President of the Deutsche Bundesbank, gave a talk in German on 18 September, at a colloquium of the Institute for Bank-Historical Research in Frankfurt, the heart of historic Germany. The caption of the event was: “Paper money — public finances — inflation. Did Goethe hit upon a core problem of monetary policy?”

The background to both was a grave loss of confidence in the euro. Introduced in January 2002 with much fanfare, the new currency would herald, it had been claimed, an era of unprecedented growth, full employment and stability.

A decade later, the promise remained unfulfilled. In fact, quite the opposite had been experienced.

A series of sovereign bankruptcies, unprecedented levels of unemployment and a severe drop in real living standards across much of Western Europe shook the euro, and its credibility, to the core. 

Each nation and their economic system, it turned out, didn’t easily fit in a one-size-fits-all monetary system. Pressure was building. Something had to be done. 

What, though, remained to be determined. The two speeches pointed in two opposite directions. Only one could become the basis for policy action. The other would be buried in a graveyard of alternatives.

In terms of styles, content and delivery, Draghi and Weidmann’s respective audiences were treated to very different performances: one extempore, the other deliberate. Both spoke to their flocks in their own ways. 

Here was a real leader: no longer Mario Draghi but Super Mario

Draghi’s contribution was, perhaps understandably given the circumstances, driven by necessity and wrapped in defiance. 

The ends, the survival of the euro, justified everything. The Central Banker’s field of vision narrowed down to that sole aim. Everything else would have to fit into that one imperative or be cast aside. 

Attack was the best defence, he felt. This freed him from the usual constraints within which civil servants usually operate. He had to persuade the financial markets that he was the bigger dog in the speculation fight. 

Parsimonious with details but generous with slogans, he audaciously strayed into the minefield of politics. “The only way out of this present crisis is more Europe, not less Europe,” he said. The crisis should be used to push through a Europe built on four building blocks: fiscal, financial, economic and political union. 

All the agreements, treaties and painfully crafted multinational compromises of the past were ripped up. The ECB rule book was thrown out of the window in real time. Powers, he said, will (not should) be stripped from nation states and transferred to supranational institutions, such as the one he led at the time. 

He went further. People, he said, “underestimate the amount of political capital that is being invested in the euro”. A timely reminder that the euro was, and is, a political project not an economic one. 

The euro, Draghi fancifully suggested, was “a bumblebee” that had to “graduate to a real bee”.

As he spoke, for a brief moment, the real, stuttering Europe faded from view. A dreamlike avatar materialised in her place. Here, the Eurozone was more dynamic than the United States, more socially cohesive than Japan and stronger financially than both. 

Fewer democratic constraints and more central direction and commitment would solve all. The ECB would double down, not fold — not under his watch: “the euro is irreversible.” 

He talked as day traders do, with a similar attention span, mixing bravado with levity, opining with confidence and without detail. Will and determination to act were palpable; caution and restraint absent. His audience, he knew, wouldn’t care. They just wanted direction and a Great Leader to guide them. He rose to the challenge. 

The complexity of Europe with all her nations and squabbling peoples was, for a moment at least, forgotten. 

“The ECB is ready to do whatever it takes to preserve the euro area,” he said with unshakable, unflinching and unadulterated conviction, adding Don Corleone-like, “and believe me, it will be enough.”

The markets reacted with glee. A wall of freshly printed euros would soon be flooding the system. A decade later, in May 2022, the ECB’s cumulative “quantitative easing” programme “stood at €3419 billion” from a standing start in 2015 — a staggering 70 per cent of the Eurozone’s main aggregated stock market indices valuation. 

To audiences accustomed to sedate technocrats, it was the tone and the intent rather than the actual content of the speech that was electrifying. 

The brazenness was unforgettable, the excitement akin to experiencing a 1980s Latin American style Pronunciamiento. Here was a real Leader. No longer Mario Draghi but Super Mario. 

Jens Weidmann chose a very different path: less Le Corbusier, in his counterpart’s effort to rationalise a complex ecosystem or streamline the ECB; and more St Thomas Aquinas, in its intellectual depth and rigour. 

The theme was, not coincidentally, paper money and inflation. The hook was Goethe, born in Frankfurt in 1749, recognised as Germany’s greatest playwright. The heart was Faust, a play considered by many to be the author’s magnum opus and Germany’s greatest work of literature, published posthumously in 1832.

Weidmann started briskly: “Goethe already analysed the core problem of today’s monetary policy around 180 years ago”, presaging Milton Friedman’s view that inflation is always and everywhere a monetary phenomenon. 

Weidmann took his audience on a thoughtful history of money tour going back millennia, from shells as currency to the breakdown of the Bretton Woods agreement in 1971 when “the US dollar was removed from the gold standard”, giving rise to a global fiat currency system.

Trust is central, he said, as was discussed “by Aristotle in Politics and Nicomachean Ethics” in the fourth century BC. 

Jens Weidmann agreed with Draghi about the immense financial power of Central Banks; it can create money “out of thin air”. But the caveat, while discreet, was all important: “in principle”.

Europeans were sacrificed on the altar of ‘single currency’

By bringing Goethe’s Faust into the picture, Weidmann weaved the history of money and inflation into the human story. 

Enter Faust and Mephistopheles, the devil. 

The two characters find themselves at the court of the emperor. The ruler, who likes revelries, is in financial distress. His people are overtaxed and the army underpaid. Things are not going well for the dandy sovereign. 

The devil, dressed as a clown, approaches the emperor and (absent gold) persuades him to print money. The paper notes read: “To Whom It May Concern, may you all know, this paper’s worth a thousand crowns or so.”

Soon, the emperor pays off his debts. Pressure is off the peasantry; the army is paid. Euphoria ensues. To general acclamation, Mephistopheles says “just drown your needs in wine and love-making”.

The court experts are all impressed. Of the paper money just created, the chancellor says, “that’s changed to happiness our misery.” 

There is a short term boost but after a time, the situation “degenerates into inflation, destroying the monetary system”. 

Society collapses. The Empire falls into anarchy. An anti-Emperor emerges to overthrow the incumbent. Civil war comes to an end only with the help of Mephistopheles’ black magic. 

Unlike Draghi, who used modern, bureaucratic jargonese, in which the human barely features, Weidmann spoke of the mystical and nightmarish power that flows into the hands of central bankers in quasi-religious, sacred terms.

Humanity is at the centre of it all. Temptation fuels the nightmare. Few policy makers, history tells us, are equipped to resist its ruinous charms. 

Reforms are postponed; the discipline that comes from matching revenue with expenditure is eschewed; compromises do not need to be reached. Everything can be approved, including national lockdowns. 

Governments have succumbed to the siren calls of the monetary printing presses — or its equivalent — since time immemorial. 

Their ever expanding demand for funding leads inextricably towards a strong expansion in the volume of money. For the sake, from a German perspective, of a stable society, central bankers must remain independent. 

Politics guiding monetary policy is destructive, not to say lethal. 

However, in his speech, Draghi explicitly announced that he would interpret his duty through that prism and in that order. Monetary stability would not be his priority. 

Goethe’s Faust is a cautionary tale. As such Weidmann’s speech takes the character of a Cassandra-like Greek tragedy. 

The message was heard but ignored because to have done so would have been inexpedient and required serious reflection. Europeans were thereby sacrificed on the altar of a project called the “single currency”. 

The constraints of reality will always re-establish themselves regardless of Man’s plans. 

The costs attached to Draghi’s “whatever it takes” promise have grown ever more. Europeans in the Eurozone are now substantially poorer than two decades ago. 

To cap it all, the region is trapped with a currency that — contra Draghi — is neither a bumblebee nor a bee, designed forever to remain in transition.