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Friday, September 05, 2014

ECB surprises markets with interest rate cut and purchases of private assets: Round-up of reactions from around Europe

As we predicted might happen, the ECB surprised markets yesterday with the announcement of an interest rate cut and the purchases of private assets.

Open Europe’s Raoul Ruparel has a full analysis on his Forbes blog, where he concludes:
“In summation, Draghi surprised the markets with some bullish action. That said, I remain unconvinced that these programmes will do much to boost inflation, growth or even credit supply in the Eurozone. Importantly, the ECB is nearing the end of the actions it can take, and it is very aware of this. The onus has now once again been shifted to governments, with the expectations rising for action. For the first time since 2012, pressure is now really increasing for Eurozone governments to reassess the Eurozone’s institutional structures and take action to pool further sovereignty. Draghi may have come bearing gifts for markets but he came with further warning for governments.”
Needless to say, the fallout from the ECB's announcements has been widespread and varied. Below are some of the best reactions from papers across Europe. As one might expect, the German press was less than impressed with the policies unveiled by Draghi:
Die Welt’s Economics Editor Sebastian Jost describes the announcement as “Draghi’s last roll of the dice”, and claims that the ECB has demonstrated “an unusual passion for experimentation”. He also argues that “the ECB has now done pretty much everything which appears to be economically justifiable. Whoever wants a stable monetary union should hope that it does not go any further.”

Süddeutsche Zeitung’s Economics Editor Ulrich Schäfer describes the ABS as a “highly dubious innovation”, claiming that it resembles many of the financial products that contributed to the initial financial crash “when no-one could ultimately identify who had lent whom how much, and therefore who had assumed what risk.” He concludes that it is “ironic” that the ECB wants to give such products “renewed respectability”.

FAZ’s Economics Editor Holger Steltzner criticises Italy and France for delaying structural reforms in order to get more help from the ECB. He also argues, “Does the purchase of securities, which banks are struggling under the burden of, even come under monetary policy?...How can the ECB eventually return to normal? As soon as it increases interest rates, it will threaten itself with losses.”
Again as many would have predicted, the Mediterranean press took a more sympathetic view of Draghi’s decisions.
An editorial in Spanish daily El País argues that “the ECB hasn’t disappointed…[but] it’s equally necessary that the governments with sound public finances – and notably the German government – intensify investment and temporarily back greater flexibility in the necessary requests for public finances adjustment in the eurozone as a whole.”
The deputy editor of Spanish daily El Mundo, John Müller, makes an interesting point, “The enormous debt – both private and public – that has been amassed, is such a huge burden that it is surprising that no-one is addressing the problem seriously...Yesterday, Draghi only asked for help [from eurozone governments] in the form of fiscal measures and reforms, but not [in the form] of debt restructuring. In short, we don’t know if the monetary sorcerer has correctly identified the reason why we have lost the favour of the gods of growth.”
Columnist Jean-Marc Vittori writes in French business daily Les Echos that “the currency won’t be enough to save Europe”, and argues, “[There’s] no tenable monetary union without budgetary union. In a continent where the temptation to withdraw is growing, this appears to be a challenge. Nonetheless, it’s the condition for the survival of the euro.”

Italian Economics Professor Donato Masciandaro writes in Il Sole 24 Ore, “Draghi couldn’t have been clearer: the later the necessary fiscal and structural policies come, the less effective monetary policy will be…Such a decisive statement should make everyone reflect. The [European] Union is like a bogged-down machine. It has at least four traction wheels – currency, taxation, competition and labour – but only one of them is working. In such a situation, the machine risks going under.”
Italian journalist Danilo Taino writes in Corriere della Sera, “[Italian Prime Minister Matteo] Renzi is a lucky guy, since no [Italian] Prime Minister ever got this sort of help from the ECB. This means, however, that [Renzi] won’t be able to ask for anything else from Draghi. The ECB President has reached the extreme limit – except for a difficult, potential government bond-buying programme. From now on, everything is in the hands of governments.”
One interesting take away, particularly from the articles from around the eurozone periphery, is that there seems to be a renewed push for measures such as further budgetary union and debt-pooling. It looks as though there is a growing acceptance of the limitations of ECB action, and the continued flaws in the Eurozone architecture – something which we have long warned of.


Anonymous said...

Time to get the heck out of the EU (for those who can) is drawing close.
It is more and more likely that it's going to turn into a fascist hellhole.

Jesper said...

Might be worthwhile to examine the credit-bubbles before engaging in something new?

In Ireland and in Spain the bubbles were driven by alliances of:
-government officials

They co-operated closely, there is more than a hint of corruption and cronyism.

Capital flowed through this alliance, the mechanism was the banking system and the capital ended up being mostly wasted.

The suggestion of fiscal transfer to send capital is based on yet again sending it through one of the members of the discredited alliance - the government officials.

The lack of criminal prosecutions show that the alliance is alive and well. So why is there an expectation that fiscal transfers routed through this alliance would be better used?

David Horton said...

Let’s say that one day you have a fever. You treat the symptoms with some paracetamol, but two day later, you are still ill. So you go to the doctor. She gives you some antibiotics. You take it for two days, but feel a bit better, so stop. The infection comes back, but worse. You finish the antibiotics, but amazingly they no longer work. So you end up in hospital.

This is how the ECB operates. It dabbles, paints over the scratches, fiddles but never takes the decisive remedial action because of its inherent weakness.

The fundamental weakness of the ECB is that despite its brave words, it must consider all its dependent economies. So what is good for Germany is unlikely to be good for Spain. What would help Greece, might hinder France. The fault lies not in the variety & efficacy of the tools they have to do their job, but in the willingness to use them for fear of harming either the best or the worst performing economies. This results in them doing a bare minimum; a couple of aspirin or a sticking plaster, where what is needed is major surgery.

This inability of the ECB to act decisively has two effects. Firstly it is seeing the Eurozone economy being held back both at the top and the bottom. Other economies, particularly those that are in the EU but not the Eurozone, are stretching ahead, unhindered by this ECB reticence. EU demand for goods and services is increasing, but eurozone economies are not placed to take advantage of it, so some of the non-eurozone EU countries are picking up the slack. Mainly us in Britain, it seems.

The second effect is more concerning. The ECB has wasted its ‘tweaking’ capability by applying it piecemeal. They have no space to lower interest rates, what is now 0.05%? Farcical. What next? Nil? Minus?! The ECB pays you to borrow money?! Deposit rate percentages are already minus 0.2%.

So, what have they left in their arsenal? Once lending rate is reduced to nil% and once deposit rate is -1.0%?

Buying up eurozone government bonds. And you would be hard pressed to identify a better example of total concept failure than for the ECB to magic up money from the ether and buy bonds. Buying up debt, at the same time as having these eye-watering lending and deposit rates is one step from meltdown. Who can trust a bank that allows that on its watch?

The ECB has only one chance of avoiding catastrophe. Evict the failed economies from the eurozone. Which it can’t do because that would be admitting that the project has failed and the EU would never allow it.

So the ECB will stumble on, ten steps forward, nine steps back, all the time the British economy continues to grow and grow. And as Britain grows (largely at the expense of the eurozone), the clamour from Britain to break away will grow with it.

No wander Panie Tusk’s first words were to acknowledge that the EU needs to address Britain’s insistence on reform. Sadly Mr Tusk won’t be able to deliver what Britain wants. A ‘non-size’ fits all, multi-tier EU with the option for member states to return to something no more intrusive than the EEC model.

Anonymous said...

This would mean that the few countries which are still solvent, Germany, the Netherland and Austria, also Finland perhaps would have to transfers every year a sum of about 100 to 120 billion Euro to Brussels to keep the debt-ridden countries afloat. There is virtually only one was to do this drastic cuts in areas such as health care and pensions (the first would reduce the burden of the latter anyhow). This won't be a policy that is easy to sell to an elderly electorate, I am afraid but perhaps people are willing to sacrifice themselves, R. G. Asch

Patrick said...

It's illegal!


1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of
Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.

Anonymous said...

Interesting bit of text, but which art. 104? Art. are you referring too? TfEU 104 is on competition and protocol 4 TEU/TfEU on the ECB and ESCB has no art 104.

Anonymous said...

"Might be worthwhile to examine the credit-bubbles before engaging in something new?

In Ireland and in Spain the bubbles were driven by alliances of:
-government officials

Let's get this straight. The excess and incredibly cheap credit was provided by the EU by way of the Euro project which enabled the PIGS and others to borrow at artificially low interest rates.

Added to that was an extremely poor level of governance (read non-existent) by the EU and ECB and we are where we are now.

This is what happens when competent politicians try to fuse politics with money.

The only beneficiary has been Germany (via consistent trade surpluses through an artificially low currency) and Germany is going to have to pay by either providing the bail-out monies, leaving the Euro or letting Club Med leave the Euro and devalue.

Germany is again running a massive trade surplus so has taken no steps to re-balance MananaZone trade.