On December 8 last year, Mario Draghi sat down to chair his second policy meeting as European Central Bank president.
Wearing the same understated, dark blue tie he had sported when he led the ECB to a surprise interest rate cut at his first meeting as president a month earlier, Europe's most powerful banker wanted to hear his colleagues' arguments on what action to take this time.
The meeting, held on the 36th floor of the ECB's glass and steel Frankfurt headquarters, opened with recommendations from veteran policymaker and chief economist Juergen Stark, a German, according to two people present. Made in the Bundesbank's inflation-fighting mould, Stark felt the Council should wait to see how price pressures developed before moving again. Inflation was running at 3 percent, well above the ECB's target of just under 2 percent. This was no time to cut.
But not everyone on the 23-person Governing Council agreed. Some advocated an immediate cut. There was also pressure from financial markets and some politicians to address Europe's problems by buying Italian bonds en masse - a splurge opposed by Stark and other hardliners on the grounds that it amounted to financing governments.
Draghi held back at first, allowing the debate to play out. But as momentum in the room began to shift behind a rate cut, he brought the Council to a conclusion. The bank would cut. It was the first time Stark, who was preparing to leave the board after 5 1/2 years, had ever been overruled on an interest rate proposal, ECB insiders say.
Mario Draghi, 64, has taken the helm of the euro zone's most important institution in the midst of Europe's deepest financial crisis since World War Two. He faces a seemingly impossible mission: satisfying German demands to focus on the ECB's main mandate of ensuring price stability, while at the same time dealing with market and political pressure from other countries to steer Europe out of a debt crisis that has engulfed Greece, Portugal, Ireland, Spain and even his native Italy.
The back-to-back rate cuts took the euro zone's interest rate to a record low of 1.0 percent. But they also sent a clear message that Draghi's ECB would be decisive, pragmatic and prepared to ignore its powerful German contingent.
Mario is very reserved, said one non-European central bank chief who has worked with him closely. He takes his time and listens carefully before making a decision. But when he does, he's all in.
To get an idea of how far Draghi's quiet revolution might go, take a look at what else he did at that December meeting. As well as cutting interest rates, the Italian announced twin long-term funding operations that would subsequently see the ECB funnel over 1 trillion euros to banks, while relaxing the conditions for them to tap ECB financing.
The funding ploy was initially lost on financial markets, which had been looking for the ECB to ramp up its bond purchases. Only later in December, when the ECB granted banks nearly half a trillion euros in the first of its cheap, three-year loans, known as LTROs, did markets grasp the full implication of what the central bank had done. In one stroke, Draghi's ECB had allayed Bundesbank concerns about funding governments even as it provided banks with so much cheap money that, with some government encouragement, they could buy sovereign debt themselves.
The move was quantitative easing by another name, and unleashed a wave of money just as the U.S. Federal Reserve and the Bank of England have with their QE programmes, but with a sleight of hand that averted German protests.
The liquidity ploy also staved off a collapse of the banking sector. The European banking shares index has risen some 15 percent this year and traders say interbank lending is slowly starting to pick up.
While the ECB had begun preliminary work on the liquidity plan under Draghi's predecessor Jean-Claude Trichet, it was Draghi who sensed that banks needed the long-term loans and pulled the trigger on the operation, buying time for governments to address deeper debt issues.
Taken together, the rate cuts and the liquidity operation were a one-two combination that Trichet, or the ECB's first president, Dutchman Wim Duisenberg, never attempted.
Policymakers including U.S. Treasury Secretary Timothy Geithner and International Monetary Fund Managing Director Christine Lagarde have praised the funding move.
This is what saved the euro, in my view, said Francesco Giavazzi, an Italian economics professor who has often worked with Draghi since they studied together at the Massachusetts Institute of Technology (MIT) in the 1970s. If Draghi had launched a bond-purchase spree of the same magnitude, he would have been killed by the Bundesbank and the German public. Instead, I think he achieved essentially the same result in a way which allows him to survive politically.
The son of a bank executive father and a biochemist mother, Draghi had a comfortable upbringing in Rome before both his parents died, leaving him orphaned in his mid-teens along with his younger brother and sister. Draghi and his siblings were brought up by an aunt. Later, Draghi was taken under the wing of Federico Caffe, a prominent Italian economist and university professor.
Draghi earned an economics doctorate from MIT and later worked at the World Bank in Washington for six years. In 1991 he returned to Italy to work as director general of the Italian Treasury, before joining U.S. investment bank Goldman Sachs. He has also taught at Harvard and most recently ran the Financial Stability Board (FSB), a global bank regulator.
The breadth of his experience - academic, government, private sector, as a regulator - gives him a background few central bankers share. In particular, say some who know him, his time in the United States shows through. In weighing whether to cut rates in December, for instance, he had to take into account two factors: inflation was running well above the ECB's target level but economic indicators pointed to price pressures easing markedly in 2012. His decision to act early was a departure from the accepted German way.
He brings this U.S. attitude of being more pre-emptive than has been the case with the ECB in the past, said Domenico Lombardi, a former IMF and World Bank executive board member who has worked with Draghi and remains in contact with him.
The Italian - referred to by other ECB policymakers as 'Mario' where his predecessor was always 'Trichet' - has also sought to create a more collegial Governing Council. Draghi has radically changed both the tone and substance of meetings, said one member of the policy setting body.
In his later period, Jean-Claude Trichet was very rigid, the policymaker told Reuters on condition of anonymity. Council meeting sometimes turned into shouting matches. When someone said something that Trichet disagreed with, he would cut him off or speak out harshly against his idea to discourage anyone else from following up.
The ECB's decision last August to reactivate its controversial bond-purchase programme was one such meeting. Trichet insisted one weekend that the bank should intervene on debt markets to relieve pressure on Italy and Spain, dismissing calls from Stark to wait and see how things developed, said another ECB policymaker, visibly uneasy on recalling the episode.
Draghi is very different, the first central banker said. He encourages discussion. He wants to stimulate creative thinking. Things are much more open.
Trichet declined to comment.
WHY SHOULD I?
Draghi makes fewer speeches than his French predecessor, who styled himself as a European statesman. Staff are learning he likes to keep things simple. In January, when a staffer presented him with a lengthy agenda of meetings and briefings at the World Economic Forum in Davos, Draghi pushed back. And why should I go to Davos? he asked. He ended up attending the meeting for a day; Trichet would regularly stay for two or more.
Unlike Trichet, who was constantly on call and wanted to be involved in every decision, Draghi has made clear to ECB staff that once he has left for the day, his work is done. He takes personal care of the most strategic and relevant issues but all the rest he would delegate to his team, said former colleague Lombardi. He makes sure to exercise - golf is a passion though he has yet to join a club in Frankfurt - and makes time for his wife, who moved to Frankfurt with him, although they are seldom if ever seen in public.
Draghi's reserved approach and the way he jealously guards his private time have prompted close confidantes to wonder how much the early loss of his parents has formed him.
Fellow MIT student Giavazzi marvels at Draghi's ability to focus. A characteristic he has maintained from that time is an ability to find what is important at any point in time and to concentrate exclusively on that, Giavazzi said.
At the same time, Draghi understands the diplomatic game. While pressing his candidacy for the ECB presidency last year, he was careful to cultivate an image in Germany as a steady central banker with a respected position in international economic and political circles. He got the job only after Germany's man, Axel Weber, who opposed the ECB's bond purchases and was unwilling to lead a Governing Council which backed such a policy, pulled out of the race.
That left Draghi as the favourite but also facing popular opposition in Germany, where the mass-selling tabloid Bild warned that the euro risked becoming a spaghetti currency if the Italian ran the ECB. The memory of hyper-inflation in the 1920s, when a wheelbarrow full of cash was needed to buy a loaf of bread, has left Germans with an almost visceral aversion to price rises. An Italian in charge was unimaginable to some.
Draghi worked with a German public relations consultant to help boost his cause, and has been careful to express admiration for Germany's central bank, which Germans revere for protecting them against inflation in the post-war era.
I have a great admiration for the tradition of the Bundesbank, Draghi said at his debut news conference as ECB president on November 3, just his third day in the job. But in the very next sentence he emphasised he will be his own man. As for the future, let me do my work and we will have periodic checks whether I am in sync with that tradition or I deviate from that.
GO AHEAD AND DO WHAT IS RIGHT
He already has. When he reshuffled the bank's six-member Executive Board earlier this year he stripped Germany of its traditional hold on the bank's powerful economics portfolio and appointed Belgian Peter Praet to the post. The move helped neutralise tension between Germany and France over whose candidate should replace the departing Stark, who like Weber, quit over the bond purchases.
German Finance Minister Wolfgang Schaeuble had made a pitch for his deputy Joerg Asmussen to take the economics role, which comes with the crucial task of recommending to the Governing Council where to set interest rates.
You don't give up such a good man easily, Schaeuble said of Asmussen in late November. We take it that he is the best person for the position that Stark had.
But Draghi and the other five board members, most of them new, ignored this political pressure and handed the role to Praet, a Belgian national born in Germany whose long career bears some resemblance to Draghi's own: stints in government, in banking, in academia, and at international institutions in the United States.
Draghi gave Asmussen, a self-styled pragmatist not known as an economist, a beefed-up ECB 'foreign minister' role that makes smart use of his knowledge of international economic and financial issues. Draghi and Asmussen are in regular BlackBerry contact and often decide things by e-mail, where Trichet would consult the Executive Board more often, said one ECB insider who has worked for both presidents.
Draghi seems to work well with the German, sending him to Brussels ahead of a European summit earlier this year to prepare the ground, and leaving him there to deal with the detail of negotiations on Greek debt restructuring. Trichet would routinely go to such meetings alone.
Besides Draghi, Asmussen and Praet, the re-made six-person board - the team that runs the ECB's day-to-day business and forms the core of the broader Governing Council - includes Frenchman Benoit Coeure, Spaniard Jose Manuel Gonzalez-Paramo and Vitor Constancio of Portugal, who is vice president. Board members take big decisions together but are also happy for responsibilities to be distributed and delegated. That suits Draghi, who likes to give those below him more power. When he was at the Italian Treasury, Giavazzi remembers, Draghi delegated to a few of us who were working with him. He said 'just go ahead and do what is right'.
There have been hiccups. Draghi's low profile on the ECB Governing Council before he took over means European financial markets had no real idea how to read him. The surprise rate cut in November and a slick performance at his first news conference got him off to a good start. But in his first appearance as ECB president in the European Parliament on December 1, Draghi told lawmakers that if euro zone governments agreed to a new fiscal compact, then other elements might follow.
Many traders took that to mean the central bank was prepared to buy government bonds more aggressively. When that turned out not to be the case, some expressed puzzlement. Draghi himself was perplexed, noting a week later that he was surprised by the implicit meaning that was given (to my comments).
But while traders can learn Draghi's language, German hardliners may not. There is already growing unease among some ECB watchers - in Germany especially - about the risks the central bank has taken under Draghi. The move to magic over a trillion euros out of thin air with cheap three-year loans tops those worries.
Bundesbank chief Jens Weidmann, who opposed the loosening of the lending rules, wrote to Draghi last month to express his concerns about the risks in the decision to make it easier for banks to tap ECB funds. Weidmann, who took over from Weber, is worried that banks in weaker euro zone countries will rely too much on cheap ECB funding as well as the growing risks on those countries' central banks balance sheets.
Weidmann's concerns are echoed by economist Manfred Neumann.
One must ask, as a central bank, 'If I give a bank a three-year loan, will the bank still be there in three years?' asked Neumann, who was doctoral adviser to Weidmann, and remains close to him. That is a big risk.
Draghi seems to respect the Bundesbank but takes a long-term view of the euro zone and sees occasional policy disagreements as normal. Like any central banker, he faces a balancing act and must judge how - and when -- to act. Tighten policy too early, and he risks choking any recovery. Wait too long and inflation may take hold.
We often went mountain climbing together, recalled friend Giavazzi, describing Draghi as a good climber in his younger days. Mountain climbing can be a very safe sport if you do it very carefully. It can be dangerous if you are sloppy.
(Additional reporting by Paul Taylor in Brussels, Gavin Jones in Rome, and by Marc Jones and Eva Kuehnen in Frankfurt; Edited by Simon Robinson)