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Thursday, August 30, 2012

Draghi's incomplete vision for the future

ECB President Mario Draghi had a long and interesting op-ed in Die Zeit yesterday morning, titled ‘The future of the euro: stability through change’. Interestingly, the piece seems specifically targeted at gaining support in Germany, not unlike Greek PM Antonis Samaras' charm offensive last week. For example:
“Countries must be able to generate sustainable growth and high employment without excessive imbalances. The euro area is not a nation-state where persistent cross-regional subsidies have sufficient popular support. Therefore, we cannot afford a situation where some regions run permanently large deficits vis-à-vis others.”

“Yet citizens can be certain that three elements will remain constant. The ECB will do what is necessary to ensure price stability. It will remain independent. And it will always act within the limits of its mandate.” 
The main thrust of the piece is that Draghi dismisses the option of a United States of Europe as well as the prospect of returning to the previous setup. Instead, Draghi focuses on a 'third way', a slightly vague proposition built upon combined economic and fiscal policies and greater financial oversight – again a picture which is likely to appeal to the traditional (ordo-liberal) German economic approach. Draghi sees the political and economic developments moving in tandem over time rather than through giant leaps and grand agreements.

There are a couple of key issues that Draghi fails to address:
  • There is no real explanation of how his proposed 'third way' would address the internal eurozone imbalances he correctly identifies as a cause of the crisis, other than some loose talk of competitiveness, (i.e. there is no mention of fully-fledged fiscal union that goes down so badly in Germany).
  • How will the eurozone find the time to make the piecemeal changes he suggests? Greater fiscal and financial oversight takes time to set up and organise. He also fails to mention the political/democratic implications of pooling greater economic powers at the eurozone level. Again no mention of potential ECB spending or bailouts to buy time for these changes.
  • Ignoring these issues makes the prospect of a eurozone solution without a political union sound easy, but in reality ensuring that conditions are enforced and that money is well spent may well require such a set up. This also avoids the thorny questions of democratic accountability which follow on from political union.
Ultimately, Draghi's unwillingness to put a price tag on any of his suggestions or explain how they can be delivered in a democratic manner makes them hard to believe. The German public deserve better 'solutions' than this.


Rik said...

1. The EZ needs solutions for 2 things:
-this crisis;
-for the future a set up that is sustainable.
He is simply not giving any of those.
This crisis will need a political solution not a financial one.

2. This crisis will first be stabilised when either:
- the PIIGS are back to normal (mainly Spain and Italy) which likely could take a decade or more. 30% correction going in a 2-3% annual pace, do the very simple maths; or
- there is unconditional backing of the North over the period that it will take PLUS assurance that the north will not collapse under that load.
It is simply as simple as that.
And those are basically completely political decisions. Which shorter and medium term could be decided by politicians but longer term will be decided by voters via referenda and elections.
So longer term not his call and in the end longer term it is. (Voters can say force the Buba to make an example, voters can force/vote PIIGS out, voters can force their governments to push PIIGS out. It again is as simple as that.

3. For the long term set up there is a similar problem. We all can design a system that should work.
Getting it approved and enforced and make it work is 99% of the job.
Historically this has been the problem and seen how countries react on austerity obligations now they donot like the future looks to enfold in exactly the same way regarding enforcement.
And seen now the political horsetrading all over the place, very unlikely a welldesigned system will come out, much more likely a compromise-monster.

4. Anyway the PR of these people is horrible. No consistency (golden rule in this respect). You first make your product popular and subsequently try to sell it. Not make it first a synonyme for the plague and subsequently try to do damagelimitation. Europe should have had a platform to build it on before the crisis. Not first create a mess and then try to create one while people know well that there is a 'and you pay for it and a lot' label attached to it. Things donot work that way.
You wanted a fully burocratic basically undemocratic Europe, now live with it.

Another point being he simply is seen as a dodgy/smooth talking Southener in Germany and this simply confirms that. This PR only works in newspapers that nobody reads anymore.

Jesper said...

Draghi appears to have a clear vision of what he sees in the future for the EU:
"Political union can, and shall, develop hand-in-hand with fiscal, economic and financial union. The sharing of powers and of accountability can move in parallel. We should not forget that 60 years of European integration have already created a significant degree of political union. Decisions are made by an EU Council filled by national ministers and by a directly elected European Parliament. The challenge is to further increase the legitimacy of these bodies commensurate with increasing their responsibilities and to seek ways to better anchor European processes at the national level."

What is lacking is the details. The devil is usually in the details....

Increased responsibility for the European Parliament implies less responsibility for someone/something else. The guess is that national parliaments will lose out. & what responsibilities does he want to be transferred to the European Parliament?

& I'm a bit surprised about the use and non-use of shall: "Political union can, and shall"... compared with: "sharing of powers and of accountability can move in parallel". Power without accountability is an option?

Then he claims that sovereignty can be pooled. Pooling sovereignty is the same as giving up sovereignty.

And the part about that there has to be more powers at the centre to deal with big banks... Banks are either too big or they are not. The US managed to close small banks, big whoop. They've proven themselves unable/unwilling to deal with the banks that are too big. Why would an European regulator following the US model do better than the US regulator?

Then he implies that a currency can get stronger by a central bank printing more of it. Seriously, how would that happen? The Swiss printed money to weaken the Swiss Franc, but the ECB believes that if the ECB were to print Euros then the Euro would get stronger?

Patrick Barron said...

There is no "third way". Draghi is vague on this idea because what he really wants is a stealth and piecemeal march to political union. His contention, and that of other commentators to his speech, is that there is some means of stopping monetary destruction. Don't be fooled by this happy talk. The current construction of the euro guarantees its own destruction by allowing all members of the EMU to print as many euros as they wish via euro loans from the ECB to national central banks using worthless sovereign debt as collateral. The massive transfers of euros to German banks have not been settled through the TARGET2 system, meaning that German banks have accepted worthless IOU's from the ECB, which cannot collect its own credits due from Greek banks (and others). The bottom line is this: The European System of Central Banks, the European Monetary Union, and the euro are flawed and cannot be repaired despite the coercive measures taken.

Denis Cooper said...

Draghi has been appointed to fill a particular technical position created by the sovereign member states through their EU treaties, and it is not up to him even to propose, let alone decide, what changes should be made to the arrangements between the member states.

FreedomLover said...

Draghi is either being deceptive or deceiving himself. The ECB is NOT independent. According to the Lisbon treaty it is an agency of the EU! If instead he means being 'objective', then he should say so. Though, as one of the 4 "Directors" specifically entrusted with trying to resolve the euro-crisis (the others are the arch-integrationists Rompuy, Barosso, & Junckers), he is very unlikely even to be objective - let alone independent!

Idris Francis said...

Draghi correctly points out that the EU cannot afford huge internal trade balances, He needs to exlain not only how they might be prevented from developing, but also and more importantly, how those that already exists can be drastically reduced.

Unfortunately for him and the EU there is no prospect whatever that either could be achieved, this side of the collapse of the euro and the EU which they are making more likely by the day.

Does he or anyone else believe that somehow the Germans, who have improved competitiveness by some 30% over the last 12 years, mostly by means of low wage inflation, will now be prepared to inflate wages to revert to the competitiveness levels of 2000? Or to promise to stop improving their non-wage industrial competitiveness to allow the laggards to catch up?

Of course they won't so the only sensible rational thing for Draghi to have said was simply "The inequalities of competitivess that have grown over the last 12 years in the euro, and will continue to grow for the forseablefuture, are incompatible with the single currency.

As we cannot prevent this growing divergence, our only alternative is to abandon the single currency".

Jesper said...

What is the story with Draghi:

""If we are in the short term part of the market where bonds have a length of time maturity of up to one year, two years, or even three years, these bonds will easily expire," Draghi told the Economic and Monetary Affairs Committee of the European Parliament.

"So there is very little monetary financing effect at all in what we are doing," he said in the session behind closed doors."

Monetary financing is illegal. Is he seriously arguing that breaking the law a little is ok? If so, who can break the laws with impunity and what laws can be broken?