Conflict of interest (rates): clamour for ECB rate cut grows but Germany remains wary

The last few days have seen a shifting of consensus in the ECB rate cuts debate.

Recent economic data in the eurozone has been particularly bad, with private sector activity slowing more than expected. However, potentially more importantly, this effect has been seen in Germany and some of the stronger northern countries as well.

In response to this data most banks and analysts shifted their expectations and now forecast an ECB rate cut in May or June.

The thinking goes that, a slowing economy in these countries (and therefore lower inflation) will give the ECB more scope to cut rates without fear of it having disproportionate effects on the stronger economies. After all, the ECB is meant to find a balance that suits all countries (although it rarely does, hence the flaw of one-size-fits-all monetary policy).

As always on central banking issues though, Germany remains the key player.

German Chancellor Angela Merkel has now waded in to debate about possible ECB action. Speaking at the conference organised by Sparkassen association this morning, Merkel said:

"The ECB is obviously in a difficult position. For Germany it would actually have to raise rates slightly at the moment, but for other countries it would have to do even more for more liquidity to be made available and especially for liquidity to reach corporate financing."

"If we want to get back to a bearable interest rate level, then we have to get over this internal division of the euro zone."

In a country where central bank independence is worshiped, politicians usually stay well clear of commentating on monetary policy, so Merkel's comments are quite extraordinary. Perhaps they were prompted by increasing noise coming out of the French government over what it sees as the need for the ECB to take a more activist approach, despite a genetlemen's agreement between the two governments not to discuss ECB policy in public.

German ECB board member Joerg Asmussen also weighed in yesterday saying:

"Monetary policy is not an all-purpose weapon for any kind of economic illness…Due to impaired monetary policy transmission, the pass-through of rate cuts to the periphery would be limited, and this is where they are most needed.

At the same time, rate cuts would further relax already unprecedentedly easy financing conditions in the core. This is not per se a problem – but interest rates that are too low for too long can eventually lead to distortions. In particular:

• to a misallocation of resources, which ultimately leads to lower potential growth,
• to excessive capital inflows into a number of emerging economies with exchange rate effects and credit risks,
• and to reduced incentives for governments, banks, and corporates to adjust."

For numerous reasons, it seems that a rate cut should not be taken for granted after all. Asmussen is  right that given the broken transmission mechanism and market fragmentation, any cut will have limited effect on the economies where it's meant to provide a boost. But more importantly, there is still a view in Germany that lower rates could have a harmful effect particularly by pumping up an asset and property bubble – similar to those seen when newly low ECB rates were introduced in the south during the euro's creation.

That said, the wave of voices calling for some ECB action is growing, particularly given the wider debate on austerity. It will be tricky to balance this with the demands of the northern countries.

Once again the ECB finds itself stuck as the main player in an increasingly political debate.

German inflation backlash alert (it took about 12 hours)

Well, it didn't take long. You may have thought that yesterday's comments from people allegedly close to Bundesbank President Jens Weidmann to the effect that Germany could live with the shocking inflation rate of 2-3% were in any way a sign that Germany was about to cave in on its resistance to anything that resembles high inflation. Well the front page of Bild Zeitung - the gold standard of European tabloids (pun intended) - says it all:

The “Bundesbank is going soft on the euro”, adding that:

“Over the next few years prices in Germany will rise much faster than before. Our venerable Bundesbank, the sacred guardian of price stability, will do nothing about this since it considers it to be ‘manageable’”.

And in case the 13 million or so Bild readers didn't get the message, page 2 features a giant picture of a one trillion DM banknote from the Weimar era:

An op-ed by the paper's chief editor Nikolas Blome argues that:

“[inflation] will above all hit workers, employees and pensioners. Precisely those who kept a cool head and ploughed on through the crisis. This is unfair. It gnaws at our trust in money and our major institutions, in politics and central banks… since Germans have bitterly experienced it themselves they know that high inflation ultimately breaks down every society”. 

It wasn't only Bild though. The man himself, Weidmann, moved swiftly to deny the reports, claiming in an interview with Süddeutsche that this was an “absurd discussion”. He clarified that keeping inflation below 2% in the eurozone as a whole meant that “in some cases” German inflation would be higher, but that “we will ensure [in the ECB’s governing council] that inflation in Germany will not run out of control. Citizens can rely on the vigilance of the Bundesbank”.

This is one national core belief you don't mess with.

Is the Bundesbank going soft?

Shock horror. According to Reuters Deutschland, an unnamed central banker close to Bundesbank President Jens Weidmann today said the following, in response to the wide rumours that the Bundesbank may be willing to accept higher inflation to help solve the eurozone crisis:

“By this it is meant [that with] a rate of inflation that is moderately above the target of the ECB which is just under 2 per cent...No one need be afraid of massive currency devaluation”. 

 Apparently, the belief is that the Bundesbank 'can live with' 2.5% or 2.6% inflation.  

This follows an interview with German Finance Minister Wolfgang Schäuble,  published by Focus over the weekend, in which he said thus:

“It is fine if German wages are currently increasing more sharply than in all other EU countries”. 

After many years of reforms, he said, Germany has done its homework and can afford higher collective wage settlements than other countries.

So is this a sign that Germany is starting to follow the advice of a whole host of Anglo-Saxon commentators who see higher inflation in Germany as vital if the euro is to survive? 

We wouldn't bet on it. When commentators talk about higher inflation, they have something much higher than 2.5% in mind (though some commentators may not realise that themselves) - this certainly doesn't seem high enough to encourage the re-balancing and evening-out of competitiveness which many believe the eurozone needs to survive in the long term. The media may be getting ahead of itself on this one.

Draghi's Den

It’s been a whirlwind entrance for Mario Draghi as ECB President and today’s meeting of the Governing Council was seemingly no exception. The key decisions which came out of the meeting were much what we expected, although with a few twists, while more importantly Draghi tackled some of the interesting problems facing Europe fairly bluntly (for a central banker anyway).

Key decisions

1) 0.25% interest rate cut: Essentially needed to be done since markets had come to expect it and the prospects of a eurozone recession next year are looming large. Probably highlights previous rate rises as a mistake, at least in retrospect, has been shown up by eurozone leaders failure to tackle the crisis. The failure of a single monetary policy looks to have been papered over while eurozone contraction sets in, but when/if Germany starts growing quickly again (relative to the rest of the eurozone) Draghi will have some much tougher decisions.

2) Long term liquidity to banks (3yr loans): Widely reported that banks would struggle to secure long term financing without such a move (have €230bn in debt maturing in Q1 2012). Not ideal given the ever increasing dependence from the banking sector on the ECB, but should be seen as a one off. Hopefully will increase lending in the broader economy but this is not assured, especially since unlimited short term liquidity has failed to do so.

3) Easing collateral rules: Greater acceptance of asset backed securities (ABS) – sounds ominous. Not ideal but does come with clear criteria and conditions. There have been indications that banks are running short of viable collateral. Without such a move, this could cause deleveraging or force banks to shift to Emergency Liquidity Assistance (ELA) which accepts even worse collateral and is more secretive. This could, however, potentially propagate the movement of poor quality assets onto the ECB’s balance sheet.

Interesting comments by Draghi

- “The ECB is not a member of the IMF”: Draghi went to some lengths to stress that the plan for eurozone national central banks (NCBs) to lend to the IMF so that the IMF could lend “exclusively” to struggling eurozone countries would not be possible. One point which has been raised is that IMF money is fungible, so the NCBs could contribute to the IMF general reserve account which could then lend to eurozone members. In any case, Draghi made it clear he’s not keen on ECB or NCBs lending to the IMF and may try to stop any proposal, even if it isn’t de jure illegal.

- “We shouldn’t circumvent the spirit of the treaty”: Draghi said this countless times. He reiterated his opposition to increasing bond purchases. He also seemed to suggest he would reject similar ideas of ECB lending to states even if they could be justified as de jure legal if they were de facto illegal and broke the principles of the treaty.

- ‘Other elements will follow’ fiscal compact comment was misinterpreted: Interestingly, Draghi highlighted his surprise that his comments last week had been taken as an indication of increased bond buying, stating that he did not mean that in anyway. He suggested that he was merely highlighting the sequence of events, in that fiscal consolidation needs to come first and can then be followed by a backstop but only through the EFSF or the ESM, the eurozone bailout funds.

So, a strong expansion of monetary policy to help the banking sector a promote growth and stability. We may not be onside with all of his measures, since they may raise long term questions over what gets put onto the ECB’s balance sheet, but they are clearly within the realms of monetary policy. Using these mechanisms is always preferable to the ECB wading into the murky world of fiscal policy.

Despite this boost, markets are likely to be unnerved by his comments during the Q&A session. Draghi essentially ruled out any ECB or NCB lending to the IMF or at least suggested he would oppose the process. He also put pay to this ‘quid pro quo’ theory that the ECB will step in and increase its bond purchases if eurozone leaders agree some fiscal integration or discipline. We have to commend Draghi for his firmness on these issues, although we still fear he could wilt in the face of the increasing clamour from eurozone leaders and their reliable inability to find any solution. But at least for now it puts the ball firmly back into EU leaders’ court ahead of tomorrow’s summit.

The ECB's Italian Wishlist

It was Italy's worst kept secret. Everybody knew that the second austerity package hastily put together by the Italian government in August had been - let's say - 'inspired' by the ECB, despite several clumsy attempts to deny the existence of a letter containing a fully-fledged wish list set out in Frankfurt as a precondition to the ECB starting to buy Italian bonds.

With a bit of delay, the full text of the letter (the English version is available here) has eventually been disclosed by all the main Italian newspapers today, all of them curiously claiming that they had obtained it "in exclusive". After a quick reading, the first impression is that this letter may actually mark a watershed moment. In fact, the unquestionable resemblance between what the ECB urged the Italian government to do and what the Italian government ultimately did suggests that the letter is the first example of an independent EU institution effectively dictating fiscal policy to a member state - that it is the ECB just makes it all the more controversial.

Here are the most interesting excerpts,

Additional corrective fiscal measures are needed. We consider essential for the Italian authorities to front-load the measures adopted in the July 2011 package by at least one year. The aim should be to achieve...a balanced budget in 2013, mainly via expenditure cuts.

On this point, Italy has done its homework only in part. In fact, the second austerity package involves cuts to transfers of money to the local administrations, but the two 'flagship' measures initially envisaged to cut public expenditure (i.e. the abolition of provincial administrations and the halving of the number of MPs and Senators) have been kicked into the long grass of constitutional reform. As a result, most of the savings envisaged derive from tax hikes (e.g. the VAT increase from 20% to 21%).

It is possible to intervene further in the pension system, making more stringent the eligibility criteria for seniority pensions and rapidly aligning the retirement age of women in the private sector to that established for public employees.

Done, but the gradual alignment will only start in 2014 (meaning that it will be completed by 2026), due to staunch resistance from Lega Nord.

An automatic deficit reducing clause should be introduced stating that any slippages from deficit targets will be automatically compensated through horizontal cuts on discretionary expenditures.

Done, and it has turned out to be one of the most controversial aspects of Italy's second austerity package. In fact, the Italian government is planning to recover around €20 billion over the next three years from a reform of the tax and welfare system involving the abolition of hundreds of tax breaks currently into force. Failing that, the 'safeguard clause' demanded by the ECB would automatically be triggered, with all the consequences.

There is also a need to further reform the collective wage bargaining system allowing firm-level agreements to tailor wages and working conditions to firms' specific needs and increasing their relevance with respect to other layers of negotiations.

Done, despite protests from trade unions.

The letter also contains specific calls for liberalisation of the labour market (including breaking down the two-tier structure and greater privatisation), something that Italy needs badly if it is to return to growth (as we argued here and here), but is yet to make any clear headway on this topic.

Another interesting fact is what is not in the letter - monetary policy. In fact the letter itself highlights that these reforms are to "restore the confidence of investors" and underpin the "standing of [Italy's] sovereign signature". As we've noted before, the ECB has consistently argued that their bond market interventions have been based on ensuring effective transmission of monetary policy. The existence of the letter itself suggested that this was not the case, now it seems the content has fully confirmed that. It will, and should, raise questions about the independence of the ECB and the position it has taken up (but also been forced into) when it is dictating fiscal policy to a democratically elected government.

This letter shows beyond doubt that the thrust of Italy's second austerity package was effectively drawn up in Frankfurt, and not in Rome. Not quite the best birthday present for Berlusconi, who (believe it or not) turns 75 today...

The ECB's SMP rationale

There are many questions surrounding the ECB’s decision to purchase Italian and Spanish debt under its Securities Markets Programme (SMP), but one that hasn’t been heavily probed is the ECB's rationale for its intervention (admittedly not the biggest issue but an interesting one nonetheless).

In its statement on Sunday the ECB claimed that it had decided to “actively implement” the SMP (read purchase Italian and Spanish debt) in order to help restore “a better transmission” of monetary policy. ECB President Jean-Claude Trichet reiterated this position again today saying:

"The ECB is fiercely independent. Ours are monetary-policy decisions. They are absolutely not negotiated"

So, the ECB is essentially suggesting that they have decided to purchase bonds not because they want to safeguard the eurozone but because it is essential for the ECB to effectively fulfil its primary goal of price stability.

This may seem like a trivial difference, but it is important to hold central banks accountable for their actions, particularly when they border on fiscal policy and politics such as this instance does. The ECB is clearly claiming that it is not stepping outside of its mandate; however, this does not look to be the case. (It’s not entirely the ECB’s fault given the position that eurozone leaders have put it in, but highlights the structural problems within the eurozone, when the so-called lender of last resort can only act if it justifies its actions under the auspices of 'monetary policy').

So could the SMP purchases ever actually form part of monetary policy transmission? Well, as an FT editorial points out today, the rising yields and falling prices of Italian and Spanish government debt, combined with the growing market turmoil, could put significant pressure on European banks (Italian and Spanish ones in particular, since they hold mountains of sovereign debt). Conducting monetary policy effectively through banks and financial markets where some of their core assets are dropping in value is far from easy.

This argument makes sense, except for one important point – why, if this policy is justifiable from a standalone view of monetary policy, did the ECB need to rally so hard (reportedly sending secret letters with effective demands to Italian PM Silvio Berlusconi) to get guarantees in return for its decision? It’s become clear that the ECB applied significant pressure to the Italian and Spanish governments to get the economic policies which it saw as desirable. In Italy this meant front-loading the budget cuts while in Spain it meant instituting more cuts this year to meet the deficit targets, and we’re sure there’s more to come.

The point here is that the ECB is stepping outside its mandate and, pretty much, engaging in fiscal policy. It is necessary to do this (to some extent) because the eurozone lacks a suitable lender of last resort (as we’ve previously pointed out), but the ECB can only do this by pretending its part of its monetary policy goals. This almost ridiculous situation highlights an on-going structural flaw in the eurozone – specifically, who is the final backstop and how accountable are they?

Is Christine the answer?

With it being a relatively slow news day, much of the economic and political commentariat has focussed on who ought to and/or has a chance of replacing Dominique Strauss-Kahn as IMF chief. Everyone seems to have an opinion on this; there have been some sensible suggestions, and some totally left-field ones, such as Martin Kettle’s pitch for Peter Mandelson.

Much of the debate has centred around the issue of whether he or she ought to be European, or whether it was time for an emerging economy to take over the helm of the IMF, with China, Brazil and Turkey all pushing for a non-EU IMF chief. Allister Heath made a good point in his City AM column:

“the European-led IMF was always perfectly happy to force much harsher policies on emerging countries. These days, however, it is the Asian and other emerging nations that have put their houses in order and Europe and the US that continue to spend money they don’t have.”

However, as we know, Europe tends to prefer the status quo (regardless of whether the status quo is actually a good thing) and France’s finance minister Christine Lagarde has emerged as a clear favourite.

So is she the right person for the job?

We're sceptical. Yes, she speaks polished English, more Oxford than the typical thick French statesman's accent, which in combination with her background at US financial firms, give her some street cred in the anglo-saxon world (which is enough for the BBC to love her). And she has done a relatively good job in keeping the French economy stable. However, she's nonetheless firmly wedded to what can be described as the ‘bailout consensus’ and state intervetion which as we have pointed out multiple times is a blind alley, and there are plenty of people out there who seem to agree.

FAZ’s Heike Göbel today slams Lagarde’s statist outlook, and argues Germany ought to be supporting a more a more market-friendly voice:

“Lagarde is rooted in the French tradition, that when in doubt, one ought to argue for more coordination rather than for more competition. She is the advocate in chief for unbridled state assistance, and does not want private creditors to participate in the rescue of insolvent eurozone countries."

The Indy’s Sean O’Grady concurs:

“Impressive as she is, the French finance minister is… too steeped in the EU establishment and too much part of the French elite to be able to abandon the euro as an article of faith. For a clear-headed, dispassionate Singaporean, let us say, the decision on recommending that Greece leaves the euro would be a much less traumatic affair. And even if that were not the case, we might still be better off with someone for whom the idea that they are a Sarko crony could never stray into our minds. So while it is true that Ms Lagarde knows the eurozone's funny little ways, she might also be more blind to its failings.”

In fact, the IMF would probably benefit from having someone from outside of the eurozone’s political elite, not least since large parts of this elite - as we have documented - consistently failed to grasp how the single currency would work in practice, and has mis-judged the crisis ever since it broke.

Ultimately, whether this person is European or not is actually of secondary importance.

The ECB's herculean assumptions on Greece

An interesting presentation given in London last week by Italian ECB Board Member Lorenzo Bini-Smaghi, titled "Sovereign Risk and the Euro", looked at two possible scenario's for the eurozone: Plan A and Plan B (ECB board members aren't known for their imagination)

Plan A: Fiscal adjustment Plan B: Default / Restructuring & Exit / Split the euro

First, Mr. Bini-Smaghi showed how plan B would create direct "wealth effects, a credit crunch, social/political repercussions", etc. None of that is disputed.

Hardly surprising, he expressed his preference for plan A, claiming it "is painful, but most likely it is less costly than the alternative." (emphasis added - it's interesting to note how he qualifies that statement).

He described Plan A, which is the official EU / IMF strategy, as follows:

In the case of Greece, the primary surplus required to stabilise and reduce the debt after 2013 is ± 6%

That's assumption 1.

That Greece would be running a massive 6 percent budget surplus after 2013 isn't plausible, which Mr. Bini-Smaghi also himself sort of admitted:

if the primary surplus needed to achieve sustainability is considered too high because the market interest rate is high, there are two ways to restore sustainability:
- reduce the interest rate burden (and lengthen the maturity), while keeping it non-concessional
- haircut on debt

So if the necessary budget surpluses cannot be achieved then debt must be ‘reduced’, assuming this can be done successfully is assumption 2.

He went on to say that the proposal for a bond buy-back program - under which the eurozone's permanent bail-out fund is used to buy back Greek bonds directly or indirectly - could be a way to cut debt:

Under discussion: buy back at market prices (lower than nominal), by the member state or through the EFSF, subject to strict conditionality

We commented in our recent briefing on a possible Greek default that this, in turn, rests on two sub-assumptions:

1 – Although a large number of bonds are being held by the ECB (around €60 billion nominal value) just buying these bonds back at a discount will only reduce Greece’s debt burden by at most 4.15%. Not to mention the fact that the ECB has stated that it plans to hold all bonds to maturity.

2 – Therefore bonds would have to be purchased on the secondary bond market or in reverse auctions. It also seems that many banks are holding bonds to maturity to avoid declaring losses on already fragile balance sheets. But even if they were willing to sell it might not help. As we have already said: "the sudden increase in demand for Greek bonds, as a result of Greece itself having a €50 billion pot of money with which to purchase its own bonds, could actually lead to an increase in prices".

However, Bini-Smaghi himself admitted that having assumption 2 (reduced debt) might not be enough if assumption 1 (budget surpluses) isn't also realized, saying:

If the debt were cut by one-third, the primary surplus would still be relevant.

In other words, the ECB is relying on two pretty heroic assumptions. Greece needs find around €148.6 billion to refinance its debt by the end of 2014(not including the cash needed for interest payments), according to the Greek Ministry of Finance. Dreaming the debt away won't work.

Bini-Smaghi went on to say that in any case, "growth is key", noting that in order to restore competitiveness, this will need to happen "mainly through domestic adjustment".

He makes a list of all kinds of laudable measures that are needed for the Greek economy to grow again, ranging from" deregulation of transport and energy sectors" and "opening up of closed professions" to "increase in retirement age to 65".

Assuming that this is economically and politically feasible in Greece is assumption 3; in this case he adds no caveats. Given the well documented political unrest in Greece and the significant strength of vested interests this seems like a very large assumption as well. The country has no doubt come some way - but it still has a massive distance left to travel if it wants its economy to become sustainable.

And as an indication of the difficulties ahead, over recent days, we've heard of pretty stiff opposition from the Greeks to the proposed EU-IMF privatization plan (which could free up around €50 billion in an ideal world). A spokesman for the Greek government captured the mood: “We asked them for help...not to meddle in our internal affairs” (more on this here).

Even if the first three assumptions were proved right, and all their goals achieved there is still one more implicit assumption to this whole discussion. It is that once this is all done, the eurozone (specifically the one-size fits all monetary policy which could facilitate boom-and-bust cycles or wipe out achieved competitiveness gains) will not lead Greece down this road again.

Assuming that all of these measures will solve Greece’s long term problems within the confines of a monetary union is assumption 4.

Interestingly, Bini-Smaghi gave another speech recently commenting on precisely this issue, labelling moves towards a political union of eurozone countries "risky". Instead, he said, stronger financial supervision should be pursued in order to stop boom and busts cycles.



However, Bini-Smaghi demonstrates the enormity of his fourth assumption with the fact that he sees this new financial order as

a system of rules and procedures which binds the financial system, in the same way as the Stability and Growth Pact binds national fiscal policies.

The SGP has proven, shall we say, difficult to implement in practice, begging the question why a system for financial supervision based on the same model should be any more succesful.

The point here is that the ECB is throwing around a huge number of assumptions. A business plan being this speculative would never make it past the board in any company (well, perhaps a few). But in the eurozone this is apparently called Plan A.

If the ECB was to re-consider its assumptions, would it also have to re-consider whether plan B might actually be an alternative?

"Axel Weber geht, die Inflation kommt"

The front page of today's Wirtschaftswoche is not making any secret of how the paper sees the news of Alex Weber, previously seen as the Great German Hope for a stable euro, no longer standing for President of the ECB:

Axel Weber goes, inflation arrives

It adds that "the departure of Axel Weber undermines the trust in the stability of the euro"

Start with the man in the mirror

In an opinion piece in the FT published the other day, Klaus Regling (see photo), the chief executive of the eurozone's temporary bailout fund attempts to counter critics of the common currency.

The unelected official, who looks after €440 billion in loan guarantees, argues that "EMU’s critics will eat their words again", explaining how the euro will be saved through more budget discipline and sounder economic policies in member states.

He gives the example of Latvia, writing:

Latvia which has a currency pegged to the euro, testifies to the success of this policy. Contrary to commentators who predicted disaster for Latvia early last year unless it gave up its hard peg – in line with advice from the commission – it did not devalue its exchange rate. A real effective devaluation was achieved through severe cuts in nominal income. Today its economy is growing again. Those outside “experts”, who always seem to know what is good for Europe, should take note.

He is right that "internal devaluation" can indeed restore competitiveness, although it's questionable whether politicians in countries such as Greece are willing to follow in Latvia's footsteps on this one. Of course Regling omits to mention that, in the case of Latvia, the country's reduced competitiveness was driven by a bust in the real estate market, in turn partly brought about by Latvia's euro peg.

An article on Global Property Guide makes clear that the damage was inflicted by the EU's pressure for a euro-peg on the Baltic country, which isn't eager to go against EU guidance, given that its EU membership is also a matter of geostrategic security.

From 2004 to 2007, property prices doubled, tripled or even quadrupled, just to fall in December 2008 by a crazy 41% in real terms from a year earlier. The euro peg had first pushed mortgage rates disproportionately low, boosting excessive demand for real estate. The following adjustment through increased rates bankrupted many Latvian citizens who saw the value of their investments drop.

In his defence of the monetary union, Dr Regling doesn't mention any cure to the eurozone's most fundamental problem - its one-size-fits-all interest rate policy - which has a tendency to facilitate booms and busts (though not the only factor ). Even the Celtic Tiger, Europe's champion of competitiveness, was floored by these mechanics, as low interest rates created a real estate boom and bust, poisoning systemic banks and bringing the country to the edge of the abyss (despite the fact they passed the EU's stress tests only last summer).

As the German economy continues to boom, there will soon be calls in Germany for the ECB to jack up interest rates in order to prevent inflation. But this, in turn, will seriously undermine Spanish and Irish efforts to get their economies back on track - and potentially off set many of the hard-fought reforms that the two countries are pushing through at the moment.

No matter how much of taxpayers' money EU leaders will put on the table, as long as there really isn't a European economy, Dr Regling should continue to expect criticism of EMU's flawed construct.

And in terms of lashing out at the "outside experts" who know what's "good for Europe", we suggest Mr. Regling starts with the man in the mirror. As Ambrose noted in yesterday's Telegraph,

Perhaps it is unkind to point out that Dr Regling was the European Commission's director-general of economic affairs from 2001 to 2008, more or less spanning the incubation period of the catastrophe now at hand. To borrow the immortal line from Watergate: what did you know and when did you know it?