Mario Draghi: Your Call Is Important To Us

2 May

First up

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?

9 Responses to “Mario Draghi: Your Call Is Important To Us”

  1. Muti Kara May 3, 2013 at 7:50 am #

    We need to admit that there are limits on what can be expected from a Central Bank, which is the territory of a Banking Regulator. In my country, Turkey, for years, we had thought that the Central Bank was not doing something well enough, and had a crisis in 2001, after that, we established a Banking Regulator, within the context of a larger plan. Only after the Banking Regulator took control (along with other measures), things started to get better. Now, Eurozone has to establish its central Banking Regulator, then the ECB would do its job, and the Banking Regulator would do its job (which are, in fact, two distinct things).
    In addition, institutionalization means that management of institutions should be independent from the person heading the institution. Do we ever talk about Chinese officials? No, we talk about their institions at the most (not only because we don’t know their names). Because they are more institutionalized than western countries. It’s not something that Draghi can change, but we should be talking about the institutions, not the people. European Union has a lot of bureaucracy, many people with seemingly important titles but no authority, such as president of the European Council, etc. So, Europe should either not have entered a monetary union in the first place, of integrate even stronger.

  2. William Herschel May 3, 2013 at 8:06 am #

    I am currently reading “The Discovery of France” by Graham Robb. It depicts, extremely vividly, what Draghi and his ilk want for Europe: “nations” containing a very few, very rich “aristocrats” and 50 to 90% of the rest of the population living from day to day like animals, welcoming the deaths of the elderly and the newborn, and longing for death themselves. The book is extraordinarily entertaining, minutely researched and completely dispassionate. A masterpiece pulling back the curtain on the dreams of the 1%.

  3. William Herschel May 3, 2013 at 8:10 am #

    I should point out that “The Discovery of France” depicts France’s history, largely before the 20th century, not, especially, France today.

    Nevertheless, during the “canicule” of 2003, there were 14,000 deaths resulting from neglect in France, mostly among the elderly, so we shouldn’t say that it will never happen again.

  4. Chris May 3, 2013 at 8:24 am #

    Draghi: “First, fiscal consolidation should be based on reductions in current expenditure rather than increases in taxes…”
    The IMF beg to differ: In Appendix 1 of their April 2012 Fiscal Monitor, they find that spending shocks have much greater effect than revenue shocks – especially with a negative output gap. As a member of the Troika, Mario appears to be talking his book.
    http://www.imf.org/external/pubs/ft/fm/2012/01/pdf/fm1201.pdf

    • hedonistbot (@mustbeadevil) May 9, 2013 at 10:17 pm #

      Good find but isn’t this like deciding which leg to cut? After all Germany knew perfectly well that deficits would make it much easier to reform its labour market and its pension system back in the days when deficits didn’t matter. Why the change in tone all of a sudden?

      IMHO, it’s German politics that decides what happens in Europe and not economic theory or even the ECB.

      • Chris May 10, 2013 at 7:15 am #

        …and I would agree with you up to a point: EU monetary policy is run for the benefit of Germany (not to mentio the mandate being set up to satisfy the inflation-obsessed Bundesbank). However, possibly the most effective policy intervention in the last year or so has been OMT, and that was introduced by Draghi against the will of the Germans.
        But I digress; I was just pointing out that if this specious ad-hoccery by Draghi represents the sum of thought at the ECB over the causes of the economic and social disaster the EU has visited on the periphery, then they don’t seem to be giving it much thought at all.No wonder the IMF is tiring of its role as a stalking horse for the German deficit hawks.

  5. Zoe Keller (@KellerZoe) May 4, 2013 at 10:32 am #

    Pointless acrimonious article.
    The OMT has eliminated the re-denomination risk in the euro area, driving down sovereign bond yields, without one bond buying, up to now. No country was forced to cut budget to apply for the OMT. Quite the contrary: the fall in yields has avoided additional budget cuts for stressed countries. So, how can you say the OMT (“by turning a financial crisis into a merely economic one”) has generated an economic crisis? Both sovereign bond and stock markets have improved after 26 July 2013. How can you turn this into something bad for the real economy?
    Mario Draghi, do not bother with these people.

    • William Herschel May 4, 2013 at 9:03 pm #

      Hang around.

  6. Groda May 5, 2013 at 6:35 am #

    Shouldn’t the rally in Italy / Spain government bonds eventually translate into easier borrowing conditions for companies? Could that be what Draghi is counting on rather than a giant oil discovery?

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