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Friday, August 03, 2012

The day after Draghi: Contrasting views from Spain and Germany

The day after the monthly meeting of the ECB's Governing Council and Mario Draghi's subsequent press conference - during which he said that the ECB is willing to intervene on the debt markets again but will hold fire for the moment - we've summed up a few media reactions from Spain and Geremany, opposite sides of the debate on what the ECB's role in the crisis should be. The discrepancy between what the Spanish and German press have made of Draghi's words is fascinating.

An article in El País with the headline, “Draghi pushes Spain towards another bailout” argues that:
"With a single shot, Draghi has shifted all the pressure onto [eurozone] countries verging on intervention. That is, onto Spain. Therefore, Mariano Rajoy’s government finds itself in the thorny condition of someone who has to choose between requesting a bailout – the second, after the one for [Spanish] banks less than two months ago – or burn in the markets."
A similar headline in Spain’s main business daily Expansión reads, "Europe pushes Spain towards a soft bailout”. Interestingly, the paper notes,
"Make no mistake. Neither is Draghi the first high-ranking European official to show Spain the way to the [eurozone] bailout funds, nor did the [Spanish] government realise yesterday that this is what it is being asked to do."
In fact, the article goes on, other top European politicians, from EU Competition Commissioner Joaquín Almunia and Eurogroup Chairman Jean-Claude Juncker, made similar remarks over the past few weeks.

An opinion piece in another Spanish business daily, El Economista, carries the headline, “ECB to Spain: Seek a bailout”. The article says,
“The ECB is now an inoperative institution, the guardian of an ancient orthodoxy. At the moment, the ECB doesn’t want to be the solution…but is part of the problem…Spain will predictably see itself obliged to ask for a bailout. Sooner or later, the fearsome Troika (ECB, IMF and European Commission) will take the helm of our economy and our [public] accounts.”
Bernardo de Miguel, Brussels correspondent for Spanish business daily Cinco Días, writes on his blog that Draghi has made Italy and Spain a Godfather-style “offer they can’t refuse”, adding,
"Madrid and Rome have few options at their disposal, apart from Draghi’s offer, if they want to avoid a full bailout."
Meanwhile, over in Germany, the media have focused more heavily on the implications for German taxpayers and the fraught relations between Draghi and Bundesbank President Jens Weidmann.

Mass circulation Bild, referring to the lack of concrete details announced yesterday, carries the headline, “Could…Would…Should…What does Draghi’s euro wishy-washy mean for our money?” Still, the good news for Draghi is that as long as the ECB’s ‘monetary floodgates’ remain closed, Bild have said he can keep his Pickelhaube.

Writing in Die Welt, Sebastian Jost is less complimentary towards Draghi, accusing him of “taunting” the Bundesbank. Jost argues that:
"ECB Chief Mario Draghi obviously feels comfortable in his role of the euro-saviour. However, not yet able to offer money, he had to make do with strong words and hidden side-swipes."
An article on Handelsblatt’s frontpage asks, “How long can [Bundesbank President Jens] Weidmann hold out in isolation?”, arguing that:
“At the ECB headquarters in Frankfurt, the warnings from Germany are hardly being heard, and they clearly have no influence on decision-making.”
However, Draghi could console himself by reading FT Deutschland’s leader, entitled “Draghi’s wise plan”, which interestingly argues that:
"It would have been good not to interfere with the psychological impact of Draghi's announcement. But once again opposition came from Germany, from the head of the Bundesbank, Jens Weidmann, apparently the only one who voted against Draghi's plan in the Governing Council… It is indeed unwise to break the ranks of the Governing Council in this situation. Weidmann is fanning mistrust where he should be fostering confidence."
Two countries, two completely different roles in the eurozone crisis, two completely different interpretations of the same words. Meanwhile, European stock markets seem to have recovered from yesterday's losses. The interest rate on Spain's ten-year bonds has also decreased, after peaking at over 7.4% this morning.

The situation looks increasingly like another eurozone 'game of chicken'. On the one hand, Draghi yesterday effectively urged eurozone governments (primarily Spain, but also Italy) to show their hands first -  that is, if they think they need help to bring their borrowing costs down they should request EFSF assistance. But at his press conference less than two hours ago, Spanish Prime Minister Mariano Rajoy insisted that he first wants to see what the ECB's announced "non-standard monetary policy measures" actually involve, adding that, as regards the possibility of Madrid asking the eurozone bailout funds to buy Spanish bonds,
"I haven't made any decision. I will do what suits the general interest of Spaniards."
Who will blink first?


Rik said...

Seems pretty clear:Spain.

They are at best weeks possibly only days from an unworkable situation. They might survive yields going up to 10% or so for a few months financially. But it would open a lot of other cans of worms that everybody will like to keep closed.

Germany will likely keep pressing in the mean time. But they have much longer for that anyway and they can simply survive a few months bond buying if necesary.

Imho nearly all press is misinterpreting the situation. Or better puting the wrong stress on it. Caused largely by the fact that hardly any AngloSaxon media takes the time to read the German press. OE are one of the few exceptions.

What imho is the most important point that German public opinion starts to have simply enough of it.
They simply donot like other people deciding what is happening with what is ultimately their money. And an overview of German papers used to be a good indication of German public opinion.
Combined that the Germans as one of the fews understand that whether it is Target2 or ECB LTRO or ECB bondbuying it will cost the German taxpayer a lot of money. The German public as no other understands that at the end all this financial juggling means: Germany pays.
Imho this will give a lot of stress on German politicians, especially rather close to elections. And before we could see that nothing goes anymore when that happened.

In this respect the actions of Draghi, Monti, Rajoy could be very counterproductive at the end. For every major next step the German Parliament will have to give permission.

Also playing all this before the Constitutional Court ruling who know now that an ESM-extension is likely a following case and the ECB going further than the conditions under which the Buba could transfer its poiwers to it another on. All around the budgetright and at the same time as the public opinion looks to get even more negative.

Jesper said...

FT seems to think that going with the flow is better than to stand for ones view: In the name of fostering confidence Weidmann should change his opinion to match the others.
Remind me again, what was the type of behaviour that led to the crisis?
Was it that risk-officers spoke up or was it that risk-officers quietly went with the flow?

Rik said...

Fully agree.
Btw FTD is not related to the FT and definitely not seen by the financial community as THE German financial newspaper (Handellsblat is and by a few miles).

Anyway a lot of media especially look to take the view that Weidman is the 'strange duck'. However he is very popular in Germany. Approval rate way above 50% and this definitely hasnot made it worse. Merkel will simply not touch him or even try to.
Anyway he has seen before that resigning doesnot work, so he has taken a different approach.

On the other hand Draghi's approvalrates look tanking in Germany.
And at the end of the day it is: 'Who pays the piper plays the tune'.
Making Germany angry while you need them for at least 5 years may be even 10, is not a clever strategy. Like seen in this light changing things more into some sort of battle anyway and making it personal.

Doubt if say the Dutch and Finns will stay long in the other camp. Moving there was simply a huge strategic blunder. They should never have allowed the other side split the group to whom they by nature belong.
Huge mistake. Dutch/Finns can only achieve something by either:
-leaving or credibly (difficult) treatening therewith; or
-by joining team Germany.
Anyway I think they will revise that. At least more likely than Weidman moves over.

Rollo said...

Draghi is of course one of the experts who drove us into this crisis. There is only one way out for Spain, which is to exit the Euro. A century of austerity is not going to change Spain into the Ruhr Valley.
But this well worn can will be kicked along for a while yet; things will have to get worse before these poor people are forced to make the obvious and correct course.

Idris Francis said...

Yawn...........like a perpetual motion machine slowing down or fools' gold slowlyn dissolving in acid, the euro break-up is inevitable however many many highly paid con-artists, flim-flam men and snake-oil salesmen pretend otherwise.

All that remains is the choic of which Friday evening the announcement will be made, that Greece or Spain or Ireland or Italy has left the euro.

Rik said...

Agree 100%.

Spain has always been a second division economy. It came close to the first division in early Euro days but never really got there.
Now the problem is like with football everybody want first division stuff as half the world has become second division.

Simply it now basically will have to compete with China, India, Brasil and Co. Where wages are so much lower say 300-400 USD a month.

Even if Spain would want to face that challenge, it would mean they have to change their whole society.
Educationlevel simply is way too low. A thing that takes at least a generation to correct.
R&D spending almost non existent (while they already have no basis to astart with anyway). Also takes at least a decade to get that running and see something get out of the pipeline.
Languageskills (for service industry) poor, most still talk like Manuel (unfortunately not a joke)).
And who will come up with the money to invest. Likely nobody so it has to be financed from savings/cuts elsewhere.

Anyway it will simply take at least a generation of saving and hard work anyway even if they go for it and donot act like they do now. Next to extra cuts because of austerity and internal devaluations simply looks too much. Especially as they would need 10 years at least to work and see things going up again.

Leaves one opportunity: Euro-exit.
Won't cure all. But they wouldnot be able to blame the German's for Spanish mistakes and would have to look in the mirror.
Plus they get the pain faster so recovery can start easier.
Anyway it will be a valley of tears, but this gives them at least the opportunity not having to cry their eyes out.

Rollo said...

Yes, Rik. A possibility is the S-Euro, pronounced sewer-o for the economies that have or will go down the drain. But even that would take a degree of convergence, which simply does not exist say between France and Portugal, Belgium or Greece. They are all in the same boat, but all rowing different ways.