A few of you have emailed and asked. I understand the latest as follows: Draghi basically understands the problem, but is hemmed in by Germany. He is now to some extent freelancing and daring Germany to pull him back in. He’ll print money to target short-term yields for the debt of the periphery, which he feels Germany might eventually accept, for lack of better alternatives and because it also keeps up the pressure for policy reforms. He’s rather audaciously trying to redefine what the ECB’s mandate should be taken to mean by defining a lot of “extracurricular” activity as keeping the system up and running. He’ll push for the banking license for ESM (which would allow them to significantly expand what they do and in essence bypass some of the charter restrictions on the ECB itself), which he probably feels Germany won’t accept but what the heck he’s gotten this far so why not keep on trying? It’s easy enough to criticize him for not having made any kind of full commitment, but he’s already played more of a dare game than most observers thought possible. I say he is doing a high-quality tightrope act which probably will fail but which increases the chance of the whole thing pulling through.
He’s daring the Germans to zap him, knowing he stands some chance of going down in history as the central banker who saved the eurozone, knowing that he has nowhere else to go, knowing the Germans have nowhere else to go, and knowing that he has nothing to lose from being fired or otherwise emasculated. He also knows he has a lot of other eurozone nations on his side.
Just not the ones who will end up paying the bills.
Brad Plumer adds useful comment with a survey of opinion.
“… knowing that he has nowhere else to go, knowing the Germans have nowhere else to go, and knowing that he has nothing to lose …”
I’m not sure I understand what you mean by the Germans having nowhere else to go. I would seriously consider their return to the Deutsche Mark as among their options.
How is it good for the German economy to:
1. see its exports collapse in an export biased economy
2. see the collective German savings take a 30%-50% haircut
3. enter a depression
The rest of the Eurozone would need marks to buy German goods, which they would lack because German imports of oil would flow through nations selling to the Eurozone paying in devaluing Euros so they wouldn’t have marks to pay for German goods.
Meanwhile they would be trying to repay debt to Germans in Euros when Germans want marks which no one has.
The reduction in demand and reduction in apparent wealth would crash German consumption by far more than the actual reduction in export demand.
I don’t think Merkel has the mindset and intellectual backing of political economists to do a Reagan transformation of German values from fiscal conservatives who value saving, to Germans who see increasing public and private debt as fiscally conservative (unless Democrats are in control).
1. The DM would appreciate relative to the Euro, but if Draghi monetizes peripheral debt to keep the Euro intact inflation will have the same effect.
2. An appreciation in the DM exchange rate and lower inflation would actually increase the value of their savings, and transfers to the periphery would saddle them with a huge future tax burden.
3. This is unavoidable for the periphery, which produces nothing but government cheese, but not for Germany.
Your theory on oil purchases somehow preventing exchange of Euros for DMs is nonsensical. As long as there are market makers, you can exchange currencies.
The bottom line is, laws of economics are like gravity: you can defy them only temporarily. The Euro is crashing back down to Earth and no amount of monetary manipulation or borrowing can stop it.
Eurogeddon countdown in 3, 2 ….
Ooops – wrong thread.
This is the one where someone begins to recognize that muddling through is also a viable strategy, as subject to failure as any other, but having the advantage of being how so many solutions are found. One that doesn’t involve screaming fits, but an attempt to find a consensus that is, even if only grudgingly, when followed by the parties involved, represents the best that they can agree on.
Or not – neither the euro nor the EU are forever.
What about the “True Finn” scenario: does anyone in Germany’s political spectrum credibly occupy the “hell no we won’t pay for all that” ecological niche? Emphasis on “credibly”, since there has been hardline rhetoric but everyone expects Germany to cave in the end. Suppose a “moderate” faction of Germany’s far right splinters off and reinvents itself along those lines (jettison the nasty stuff and refocus on economic nationalism)…
Isn’t it the other way around? Other European countries might have nasty-right parties that can try to reinvent themselves. Marine Le Pen is doing this, the British Natonal Party is trying. But who the hell in German politics is in that position? If that ecological niche is to be filled, must be by someone breaking away from the mainstream right.
I don’t know much about German politics, but I don’t see much prospect of that happening in the short term.
A week ago, on friday was probably the best financial theatre that I have ever seen. Draghi had made his pronouncements, it seemed that the market was giddy with the possibility that the ECB was going to save everything and everyone. Then the reality sunk in, Germany wasn’t going to write the check.
As long as nobody does anything stupid they probably can muddle along for a while yet. Draghi did something stupid last week. When all you have left is an illusion, best not to declare ‘I have no clothes’. That is all that Draghi did last week.
Any bets that next weekend there will be another crisis meeting in Europe?
But they don’t have to write a check. They just need to allow the ECB to create some money to grease things along. Sure the increase inflation would be a hidden tax on German bank accounts, but nobody’s balance would go down in nominal terms. Would it cost Germany more to let things inflate for a while, or to deal with the fallout of a Euro collapse?
I just love this reasoning, because everyone knows that inflating governments always get their books in order eventually, and the inflation tax ends.
Some inflation would probably be no worse than what will happen if, more likely when, countries start leaving the Euro. In retrospect, the Euro was a really bad idea.
It seems to me not that the Euro per se was a bad idea, but the vagueness of the implied extent of fiscal union was the real problem.
There is no reason that Euro-ization had to drive Euro-area credit spreads together (consider ‘dollarized’ economies, or US states for that matter), but they did. And the poorer EU countries borrowed recklessly as a result.
Now that the hole is dug, the poorer countries would like monetary autonomy, but if Euro-area borrowing costs had not converged in the first place, the holewouldn’t be so bad.
In some ways, the lenders who miscalculated have to take a chunk of the hit here.
In a game of chicken it’s important to tease out the hidden red lines. I too thought his comments unwise, but now I suspect he’s trying to figure out the bluffs on the table, from both the Market and the Germans, that will determine the gap he has to shoot to beat the wave.
Wrong game. It is simply a game of power. Like any power structure, it only has any because it is granted.
Basically what’s happened is that the Germans have tried to run Europe through the EU, but now the tables are shifting and Europe is running Germany through the EU. Not sure if Merkel/Bundesbank understands this yet.
See I take the other tack… if the Kaiser could see the amount of influence a little bit of inflation would gain him, he would take it in a heartbeat.
“Just not the ones who will end up paying the bills.”
Doesn’t matter because the rest can overvote the payers in the ECB. Which actually happenend ever since it was installed. It is incredible that Cyprus or Greece have as much to say as Austria or Germany.
The EMU and the EU including its organizations like the ECB are deeply undemocratic by design. One man, one vote? Forget it, the smaller the country, the more count the votes of individuals and the nation as such.
Most european societies are in a process of accepting the need for spending cuts and limited budgets, a long and troublesome process that requires pressure from reality. Of course, Germany and the ECB cannot accept inflation as an easy way out of this crisis during this process. If they do, the crisis will repeat again and again in the future.
People that look for an easy way out are looking at this problem as a short term problem ignoring the fact that new problems will emerge from inflation and debt mutualization. In the long term, euro cannot work without fiscal responsibility of its members. While the Germans seem to have a long term strategy (thinking in decades) everybody else seems to have no strategy at all.
Since Bismarck was dumped, on matters international the German political class has been super at everything tactical, appalling at everything strategic. Why would now be different?
Because it is the German economic class that has been running things for the last couple of decades? Just a theory, of course.
Bismarck? Why bring him up. Time magazine didn’t even have him on its list of the 100 most influential humans.
Or, may be you are giving Draghi too much credit. His actions seem to have resulted in the reversed “twist” – the short rates have gone down, but the long rates have risen (see, for example here: http://soberlook.com/2012/08/draghi-engineers-reverse-twist-again.html). The problem Spain and Italy have is exactly with the long rates.
The problem for Spain, more so than Italy, is that it is being forced into fiscal consolidation at the same time as the private sector tries to deleverage its way out of excessive debt. Draghi (probably with German backing) was very clear that the ECB is willing to renounce seniority and engage in open-ended QE to target set yields on short-term sovereign debt, only on the condition that those countries accept a MoU (i.e. fiscal consolidation and structural reform). These fiscal actions will ensure inflation remains muted in the Eurozone and all but guarantee a sustained period of high unemployment and low growth (http://bubblesandbusts.blogspot.com/2012/07/ecbs-means-lost-decade-with-high.html). Draghi has convinced markets of a philosophical change by the ECB, when reality is far from it. Given his goals (not necessarily those of the people), I’d say he deserves a lot of credit.
I read this differently. He has the full support of the Germans, and the comments he made were with their full approval. The Germans are just continuing to make noise for internal political reasons; they can’t appear to be whole-heartedly behind the plan, even though they actually have agreed to it.
Isn’t it funny how peope go around and round and at the end of the day the only answer they have is “print more money – hope for manageable inflation”?
I stopped following Europe some time ago. We already know the answers, it is just really a matter of time until the thing implodes.
And how long will that be? I believe the answer is “longer than anybody thinks”.
I look at the length of the interval between weekend save the world crisis meetings. When the intervals are shorter than the meeting/announcement then the end is nigh.
Already the market upticks are shorter than the meetings.
That could be due to “crisis meeting fatigue”. At some point, these meetings won’t goose the market anymore.
I am sure Draghi understands he can’t finance insolvent governments indefinitely, just as they won’t directly finance insolvent banks. I suspect any ECB “bailout” will come with unachievable deficit targets and nothing meaningful will ever be done.
Of course he can finance insolvent governments indefinitely! Lou may not think it is a good idea and maybe it is not, but he certainly can, because he runs a central bank.
You act like it’s never been tried before.
“You act like it’s never been tried before.”
Isn’t everyone?
Just not the ones who will end up paying the bills.
Which bills is the key issue. The Spanish & Italians who, on credit or not, buy those German exports (which is the cause of the German success story so far)? The German gov’t must find a way for the non-German customers to continue paying the bills for German made product.
Funny, this seems much like the Chinese problem of making sure American customers can buy Chinese products.
There will not be enough inflation to end the crisis in the PIIGS; there will probably be enough money printing to avoid the crisis of Greece leaving the euro for another year. And then another … and then…another.
Until the Greeks decide it’s better to leave, re-Drachmatize, and devalue themselves?
Or until some anti-Merkel Christian Democratic decides to push for the Germans to leave the Euro, bring back the Deutschmark, and let the Euro devalue without the Germans?
Muddle thru looks most likely — these are VERY professional BUREAUCRATS. Willing to do anything to stay … comfy.
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