Let me just remind everybody that the ECB’s monetary policy has been extraordinarily accommodative throughout the crisis and is evident from the way financing conditions have changed: since 26 July 2012 stock markets have gone up in Germany, France, Italy and Spain, from 22% to 38%. And just in the last month, stock markets went up again in Italy and Spain, by something like 10%.
You what? Since when were stock prices a criteria by which the ECB judges how well it’s doing its job?
I was going to do another of those interpretation posts that went down fairly well last time, but that requires a higher degree of confidence about What It All Means than I feel. Still, a few points:
First up, the actual policy measures:
Draghi: We act consistently with our analysis of price developments and in line with our objective of maintaining price stability in the medium term. The weak developments in the real economy, and on the monetary and credit side, warranted action by the ECB, so we decided to cut rates by 25 basis points and, as I have said, to maintain the fixed rate full allotment policy at least until July of next year. The combination of the two measures is important by itself. It ensures the smooth transmission of our monetary policy to money markets. The fixed rate full allotment policy will represent liquidity insurance for the banking system.
In short: More Of The Same. We know – in as much as we know anything in economics that that 25bps cut will not add sufficient liquidity where it is needed. It may pump up Bund prices, and even help property owners in Helsinki or Munich, but money is not flowing to the companies and individuals that need it at the periphery for sure, and increasingly to the semi-core. This is like calling the Fire Brigade and being put on hold with periodic “Your Call Is Important to Us”‘s.
The conference unfolded in the manner of those 1960s sitcom marital scenes when the husband comes home on his Wedding Anniversary with some ragged daffodils bought at a petrol station and an extra-large Toblerone. At first the wife is indulgent, waiting for the curtain to be swept aside and the string quartet and banquet revealed (maybe those much-leaked plans to siphon funds to smaller firms?). Then, as incredulity turns to rage, the husband gets self-righteous and defensive. He has, after all, been slaving away all day for the money to pay for these delightful flowers and delicious treats;
First, fiscal consolidation should be based on reductions in current expenditure rather than increases in taxes. Unfortunately, many of the fiscal consolidation measures were implemented in an emergency situation, with most governments choosing the simplest route, which was to raise taxes. And here we are talking about raising taxes in an area of the world where taxes are already very high, so it is no wonder that this had a contractionary effect. However, now that there is more time, there could be a shift towards reducing current government expenditure and lowering taxes.
so, what the hell is this most intelligent of bankers and economists doing, stringing a continent along without at least a stab at something as direct and effective as OMT? This is, remember, probably the only senior figure in all of Eurozone politics to emerge from the last 2 years with his reputation enhanced (let’s face it, it’s a struggle to even think of candidate #2). Some guesses: either the ECB thinks that the economy genuinely is not as badly off as recent data suggests; maybe they’ve found a massive new oil field under the Northern Mediterranean; or maybe this is Teutonic Realism.
TARGET2 balances have decreased and, if I am not mistaken, are now €256 billion off their peak, a decrease in TARGET2 balances is the best sign we have that there has been a gradual return of confidence. Of course, I say “gradual”, because given the seriousness and the gravity of the previous situation, you would not expect such a change to take place all of a sudden. Furthermore, ten-year sovereign bond yields went down in the stressed countries by more than 200-300 basis points, and even in France, by 53 basis points. Finally, for banks that finance themselves in the interbank market, the EONIA is around 6 -7 basis points, i.e. almost zero.
A year ago, pre-OMT, the European Economy was like people clinging to the undercarriage of an aeroplane. With deposits moving sharply out of the periphery and government yields at clearly unsustainable levels, it was only a matter of time before the periphery lost their fingerhold and plummeted to earth. OMT moved them into the engine housing: dirty, dangerous and hugely uncomfortable, but if they Stay The Course, through no matter how much avoidable pain, they will reach their destination; and that is, probably, better than jumping. So maybe OMT is in fact it: by turning a financial crisis into a merely economic one (hey! Stock Prices!) it has done its job. Time to sign the new banknotes, carried by kids from the 16-and-a-half Eurozone nations.
One final note: i’m sorry that the FT’s Peter Spiegel, whom I admire a lot, thinks I’m being a dick about this but the probability of a slippery answer does not make it less disgraceful that for two conferences, Mr Draghi has not even been asked about capital controls on Cyprus, and that nation’s new status as a semi-detached member of the zone. My case:
Draghi: First of all, the ECB does not have the final say on this. [austerity] Let’s never forget this.
Hmmm. This is an excellent account of Ireland’s bundling into an austerity package while the government still had a very strong liquidity hand, and the Bank’s refusal to reveal the “candid” communications sent to Ireland’s politicians (here’s another). Further, it was the ECB’s decision to put a drop dead date on ELA in Cyprus that called Parliament’s bluff (“ultimatum” in Bloomberg’s term). With a compliant ECB, the austerians would have far less leverage across the periphery. Certainly the ECB will cite its charter in terms of lending to “insolvent” banks, but can we not at least behave like grown-ups and admit that the ECB can be awfully flexible when it feels like it?