New ECB chief must act as Europe again stares into the abyss

Welcome to Bedlam Mr Draghi. Yes, it's Mario Draghi's first day in the office as the new European Central Bank president, and if he was hoping, after last week's "comprehensive settlement", for a reasonably settled start, he had better think again.

We all know what Mr Draghi should be doing; he should be immediately reversing the last two interest rate increases and at the same time engaging in a much more wide ranging programme of quantitative easing through sovereign bond purchases. Tomorrow, Mr Draghi chairs his first meeting of the governing council. It's his chance to start with a bang.

Yet despite the renewed turmoil sparked by the Greek referendum announcement, it seems quite unlikely he'll take it. By temperament, he's quite orthodox in his approach to central banking, and the fact that he is an Italian will, paradoxically, make him even keener to stick to conventional monetary disciplines than if he were an Axel Weber-like, anti-inflationary head banger. He'll want to disprove the Italian steriotype. And he's terrified of doing anything that might upset Bundesbank traditionalists. So there is no reason to believe his arrival will presage an immediate change in approach after the "strong vigilance" of his predecessor, Jean-Claude Trichet.

That's not to say we won't see a cut in interest rates. The last meeting was split in leaving rates on hold, so with a fast deteriorating economy, it's possible the doves will this time gain the upper hand. Eurozone inflation at 3pc is beyond what would normally be regarded as tolerable, but everyone knows that on a medium term view, the inflation rate is going to fall well below the 2 per cent target. So a rate cut can easily be justified.

But I'd be amazed if we saw anything new on bond purchases. The ECB doesn't regard it as any part of its job to monetise the public debts of the eurozone periphery. Of course, there is a fair amount of pretence in this stance.

The ECB has already done quite a bit of bond buying, which it has disingenuously dressed up as a way of helping the "monetary transmission system". The sophistry of this explanation is ridiculous. No, what the ECB has been doing is trying to drive bond yields in the distressed single currency nations down to more tolerable levels.

Even so, the numbers have been very low against what the Federal Reserve has been doing in the US, and the Bank of England in the UK. As long as Germans believe that bond buying by the central bank is essentially monetisation of public debt – the sort of stuff that led to the Weimar hyperinflation of legend – it will be blocked from meaningful action.

Mr Draghi's challenge is therefore to persuade Berlin that bond purchases are for a different purpose – demand management. This is essentially the justification that underpins QE in Britain and the US. In both cases, the intention is eventually to sell the accumulated bond holdings back to markets, or to run down the positions by allowing the bonds to mature.

To better support this justification, ECB bond purchases would have to be much more widely spread than at present. It would have to include German bunds in proportion to the size of the German economy alongside Italian, Spanish and Portugese debt. But as I say, Mr Draghi faces an uphill struggle. Germans would prefer to suffer, or even see the euro collapse completely, than tolerate such an unconventional approach.