The Occupy movement was out in full force in Frankfurt again last week. From an impromptu camp near the city‘s exhibition centre, a sizeable and surprisingly well-organised crowd embarked on two days of protest and disruption around Germany’s financial capital.
‘Cut one’s coat to suit one’s cloth’. This is the sort of kitchen-table budgetary advice that is often doled out to those who find themselves in a financial bind. When it comes to a debate about the wisdom or otherwise of austerity of the kind currently practised in peripheral Europe, it seems odd that serious economic commentators should propose such a prescription.
There was outcry last week when the German DAX index slumped 100 points in just a few minutes. It subsequently recovered, but not before complaints were made about market manipulation and ‘fat fingers’. An explanation was easy to find on Twitter: apparently, there had been a rumour about the supposed resignation of Bundesbank chief, Jens Weidmann,
That Mario Draghi’s name was recently mentioned as a potential Italian prime minister is measure of how much the man is presently revered in politic0-economic circles. His management of the eurozone crisis and, just as importantly, of the ECB’s Governing Council, has rightly earned him high praise – Man of the Year, no less.
In April 2010 intrade.com, the spread-betting website, launched a new contract that allowed punters and pundits to bet on the breakup of the eurozone. More precisely: “any country currently using the Euro to announce intention to drop it before midnight ET 31 Dec 2012.” It immediately changed hands at 27 (per cent probability) and scarcely ever saw any price below 20 in the subsequent two years. Last autumn it reached a peak of 60. Today, it trades at 10.
‘Draghi disappoints markets’ is the headline on many front pages today. Yet, if we were to go back one year – or even one month – we would recognise the ECB’s position today is light-years away from where it was then. The Bank has just announced its willingness to buy short-dated paper from crisis-struck countries in a volume adequate to achieve its goals (in other words, ‘unlimited’). It is the pre-conditions attached to this help that markets found so distasteful: the beneficiary countries must first apply for a formal bailout to the eurozone rescue vehicles, EFSF/ESM.
Britain should not fund another eurozone bailout until we see the colour of eurozone money, said the UK finance minister in the wings of this weekend’s G20 meeting in Mexico. ‘Quite right too’, will be the obvious refrain of all right-minded people. However, things are never as straightforward as they seem. Britain will be seeing some euro-coloured money very soon in the form of ECB loans to mostly state-owned RBS and Lloyds under the long-term refinancing operation (LTRO).
The International Monetary Fund established last Thursday that it is impossible to significantly reduce the Greek debt without the support of the ECB, whose president remained adamantly against it at the press conference following last week’s Governing Council meeting. Mario Draghi said the ECB cannot accept losses on their Greek holdings, rightly describing this type of monetary financing as legally incompatible with the EU Treaties.
Frankfurt tourists probably think they have found the spiritual home of the single-currency when they pose in front of the huge euro symbol that stands in front of the European Central Bank. But it turns out that the monetary policymakers will not be taking it with them when they move to their new home on the other side of Frankfurt in 2014. They don’t want it.
Isn’t it funny that the European Central Bank hardly talks about money supply anymore? There was a time, before the crisis of course, that the Bank held it up as the shiniest pillar of its monetary policy. Jean-Claude Trichet even had to defend it early in his mandate after the US Federal Reserve decided to stop collecting some data on monetary aggregates, citing its cost-ineffectiveness.
“No” seems to be the favoured expression of Bundesbank president, Jens Weidmann: no to ECB bond purchases; no to private sector involvement in the Greek bailout; no to employing Bundesbank gold as collateral for an IMF loan. He believes that changing the rules of the game, i.e., the legal provisions of monetary union, just because they don’t fit any longer, undermines trust. Hence, he subscribes to a particular brand of central bank purism. He is right in one respect. EU decision-making does look poorly thought out, inconsistent, even expedient.
At the last ECB meeting, outgoing president Jean-Claude Trichet described the decision to stand firm on interest rates as ‘a consensus’ rather than the usual ‘unanimous’. Bank-watchers immediately pounced on the semantics, guessing that the new central bank chief, Mario Draghi, will usher in a rate cut at his first meeting. This is a huge leap of faith, especially since other major central banks like the Fed and the BoE have at various times in the recent past also disclosed dissenters among their ranks who could never push through their agenda.
Another month, another ECB rate decision. This time we know that the Governing Council will review its inflation outlook and, as a consequence, its current rate-tightening path. A number of analysts, including one Nobel laureate, believe the Bank should take back the two hikes already implemented since April
The first statement by the ECB president in the press conference that followed last Thursday’s rate-setting meeting was to express his sympathy for the victims of the Japanese earthquake and tsunami. It seemed a little stale for many viewers, coming as it did some three weeks after the event, but it was Mr Trichet’s very first opportunity to do so. It highlighted just how much has taken place in the world since the last meeting, most notably the Fukushima disaster.
Commentators blasted Axel Weber for changing his opinion on the ECB’s current emergency policy of supplying unlimited funds in weekly, monthly, and three-month refinancing operations. Mr Weber was accused not only of morphing from a hawk to a dove in one swoop, some critics charged that the Bundesbank president had folded under pressure to better his chances of securing the next ECB presidency.