There have been quite a few developments in the eurozone recently with major possible policy changes announced in recent weeks. But perhaps the most significant development is that the world has finally discovered what it takes to open Bundesbank chief Jens Weidmann’s mind up to the possibility of allowing the European Central Bank (ECB) to do what other central banks around the world normally do during an emergency. Things like buying bonds to shore up markets and stimulate the economy (“quantitative easing”). Quantitative easing is normal central bank stuff that has been effectively shoved off the table of ECB policy options by the Bundesbank’s unorthodox economic theories this entire time. At least up until now.
Something changed in the eurozone that ended up changing the Bundesbank’s mind too: The inevitable happened. That deep dark deflationary abyss that’s been threatening to gobble up the eurozone ‘periphery’ nations like Greece and Spain is starting to threaten the eurozone ‘core’:
The Telegraph
Monks recant: Bundesbank opens the door to QE blitzBy Ambrose Evans-Pritchard Economics Last updated: March 25th, 2014
The last bastion is tumbling. Even the venerable Bundesbank is edging crablike towards quantitative easing.
It seems that tumbling inflation in Germany itself has at last shaken the monetary priesthood out of its ideological certainties.
Or put another way, the Pfennig has dropped that euroland is just one Chinese shock away from a deflation trap, an outcome that would play havoc with the debt dynamics of southern Europe, render the euro unworkable, and ultimately inflict massive damage on Germany.
Bundesbank chief Jens Weidmann was not exactly panting for QE in comments to Market News published this morning, it has to be said, but the tone marks a clear shift in policy.
“The unconventional measures under consideration are largely uncharted territory. This means that we need a discussion about their effectiveness and also about their costs and sideeffects”, he said.
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Notice that Jens Weidmann was not “exactly panting for QE”. The Bundesbank is signalling that it’s considering quantitative easing (QE). It’s like promising to try to try.
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“This does not mean that a QE programme is generally out of the question. But we have to ensure that the prohibition of monetary financing is respected”.At least we can put to rest the bogus argument that EU Treaty law (Article 123) prohibits QE by the European Central Bank. This claim was always a smokescreen.
Bond purchases are what used to be known as open market operations, a tool of central banks dating back into the mist of monetary history. Purchasing bonds across the board (not just the bonds of insolvent states) is a plain vanilla liquidity management tool.
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When Ambrose Evans-Pritchard says “At least we can put to rest the bogus argument that EU Treaty law (Article 123) prohibits QE by the European Central Bank. This claim was always a smokescreen”, keep in mind that this apparently EU Treaty law that prohibits the ECB from engaging in QE is due to the argument that the EU treaty prevents the ECB from ever helping to finance a member nation’s government. So if the ECB bought Spanish bonds directly from the government in very large amounts over an extended period (which could be necessary for a real stimulus program for a large country like Spain), that could be seen as helping Spain finance itself and the Bundesbank has consistently argue that this would violate the EU treaty. That’s a central argument that’s consistently been used to explaining why “QE” can never be used even when deflation threatens the the region. Although now that the ‘core’ nations are threatened with outright deflation that opposition is changing. Maybe.
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Mr Weidmann says he prefers negative interest rates as the first resort. This is an admission that the ECB is alarmed by the strength of the euro as it hovers near the pain barrier of $1.40, since negative rates are a sure-fire way to drive down the currency.“If you wanted to counter the consequences of a strong appreciation of the euro for the inflation outlook, negative rates would, however, appear to be a more appropriate measure than others”, he said. Quite so.
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Make a mental note of this last statement by Weidmann:
If you wanted to counter the consequences of a strong appreciation of the euro for the inflation outlook, negative rates would, however, appear to be a more appropriate measure than others.
He’s not referring to the normal ECB “refi” rate going negative. That rate is being held at 0.25%. Weidmann was referring to the ‘overnight’ rate, or how much the ECB pays banks to park cash at the bank overnight. When central banks want more lending they tend to lower the ‘overnight’ rate to encourage banks to park less at the central bank and vice versa when credit conditions needs to be tightened. Negative interest rates, however, are very different in that the banks are now paying the ECB to park assets there. This is something the ECB would only do when it really wants banks to take their assets back from the ECB and use them to instead lend to the economy.
It’s also something the ECB might do if it wants to do “something” without actually doing quantitative easing (QE). So before we see any QE from the ECB, we should probably expect a period of negative overnight rates and “let’s wait and see”. That’s what Weidmann was suggesting.
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The IMF’s Christine Lagarde says the deflation risk in Europe may be as high as 20pc, which is remarkable given how much damage it would do. Indeed, as one IMF paper explains, the trouble is already enormous even at ultra-low levels of inflation.We all know what could push Europe over the edge. China invested $5 trillion in fixed capital last year – as much as the US and Europe combined – creating a further overhang of excess capacity in the world economy. This is sending a deflationary impulse into Europe, the more so since China has devalued the yuan by 2pc this year.
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It is an interesting question whether the Bundesbank can easily back QE after the German constitutional court ruled last month in imperious language that the ECB’s bond rescue plan for Italy and Spain (OMT) is probably “Ultra Vires”.
It stated that the OMT “exceeds the ECB’s monetary policy mandate, infringes the powers of the Member States, and violates the prohibition of monetary financing of the budget”.
The ruling does not prohibit ECB bond purchases as such – and is not final in any case – but it raises the political bar for quantitative easing to a near impossible level.
The irony is that the Bundesbank’s Mr Weidmann is himself responsible for the ferocity of the Court’s ruling. It was he who testified so trenchantly – though politely, as always – against the ECB’s policies at the Court hearings.
Will he now be hoisted by his own petard?
Yes, the Bundesbank is open to “QE” options now that it’s on the edge of the abyss, although before it goes down that road, negative ‘overnight’ rates should be tried first. At least that’s the course for the ECB the head of the Bundesbank was suggesting.
Still, this is pretty big news, although, as the article points out at the end, Germany’s constitutional court hinted that it thinks the use OMTs (“Outright Monetary Transactions”, i.e. bond buying for quantitative easing) is probably unconstitutional. So even if the Bundesbank really is open to the idea of QE, the German constitutional court isn’t (and the Bundesbank clearly isn’t thrilled about the idea either). So it’s good news that QE is being considered by the Bundesbank, but given all the caveats we’re hearing it’s about as bad as good news gets. When your policies involve playing ‘Chicken’ with the abyss, the ol’ “baby, we won’t be so crazy”-“two steps(back from the brink)”-“maybe” policy shuffle is a common tune to hear a central banker suddenly start whistling. It’s timeless because it keeps changing and yet always sticks to the same theme.
High Times for the eurozone. Depressingly High Exchange Rate Times
So the deflationary abyss is still threatening to consume the eurozone, but on top of that, the euro’s exchange rate has also been surging and is remaining at a consistenty unhelpfully high rate that threatens the very export-led recover that the eurozone ‘periphery’ nations need to drag themselves out of the abyss. When QE is taken off the table, exports are about the only real option left. And you can’t count on exports to stimulate the economy when the currency keeps rising:
Draghi says a stronger euro would trigger looser ECB policy
By Jan Strupczewski and Krista Hughes
WASHINGTON Sat Apr 12, 2014 4:54pm EDT
(Reuters) — The European Central Bank will ease monetary policy further if the euro keeps strengthening, President Mario Draghi said on Saturday as world finance chiefs ramped up pressure on Europe to ward off deflation.
In the clearest signal yet the ECB was prepared to launch a stimulative asset-purchase program, Draghi said the euro’s exchange rate had become increasingly important to policy and would act as a trigger.
“The strengthening of the exchange rate would require further monetary policy accommodation. If you want policy to remain as accommodative as now, a further strengthening of the exchange rate would require further stimulus,” he told a news conference.
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Over the past 12 months, the euro has strengthened by nearly 5.5 percent against the dollar and by nearly 10 percent against the yen. In recent weeks, it has reached levels against the dollar not seen since late 2011. It ended last week at just below $1.39.
Draghi said on Saturday that euro appreciation over the last year was an important factor in bringing inflation in the currency bloc down to its current low levels, accounting for as much as a half percentage point of the decline in the annual rate, which stood at only 0.5 percent year-on-year in March. The ECB aims to keep inflation close to but under 2 percent.
“I have always said that the exchange rate is not a policy target, but it is important for price stability and growth,” Draghi said. “What has happened over the last few months is that it has become more and more important for price stability.”
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Here’s a translation for this gem from ECB chief Mario Draghi:
“I have always said that the exchange rate is not a policy target, but it is important for price stability and growth” =
“I recognize that an appreciating exchange rate is both increasing the risk of deflation and harming the economies that have been ravaged by austerity and need to export their way of the economic doldrums”.
And “What has happened over the last few months is that it has become more and more important for price stability.” =
“But the ECB doesn’t actually care about nations being stuck in the doldrums. What it does care about is maintaining low inflation without outright deflation(except maybe in Spain). And because there’s now a risk of deflation in the eurozone core, the ECB now cares about the euro’s rising exchange rates”.
That’s basically what he was saying in the language of Central-Banker-ese. It’s saying things that supposed to sound kind of dovish, but aren’t actually very dovish when you translate them.
Also, notice how “Over the past 12 months, the euro has strengthened by nearly 5.5 percent against the dollar and by nearly 10 percent against the yen. In recent weeks, it has reached levels against the dollar not seen since late 2011. It ended last week at just below $1.39″. That’s really not helpful for country trying to pull themselves up by their exports.
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The euro’s recent strength has baffled many players in the global currency market given Europe’s low interest rates, tepid growth prospects and near-zero inflation. In fact, most currency analysts expected an improving outlook for the U.S. economy and the winding down of the U.S. Federal Reserve’s massive stimulus program to drive the dollar up against the euro this year.Some of the investment flows supporting the euro are reflected in the strong performance of sovereign debt from several of southern Europe’s bailed-out nations, which until recently had featured substantially higher yields. On Thursday, for instance, an auction for 3 billion euros of five-year bonds sold by Greece drew more than 20 billion euros in orders.
AN ORIENTATION, NOT A LEVEL
Quantitative easing was something previously considered highly undesirable by some euro zone central bankers, and only to be considered if prices were falling outright.
But policymakers in recent weeks publicly broached cutting deposit rates below zero — effectively charging banks that hold excess cash at the ECB — or embarking on bond purchases as have the United States, Japan and Britain, if the threat of deflation became more acute.
Draghi said two things would drive any decision: “One is an unwanted tightening of monetary financial conditions, and the second is deterioration of our medium term outlook.”
“I don’t want to give you a level where we will act or not. I am giving you an orientation,” he said of euro strength.
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Here’s another Central-Banker-ese translation:
“Draghi said two things would drive any decision: “One is an unwanted tightening of monetary financial conditions, and the second is deterioration of our medium term outlook.”=
“If we’re going to use ‘Quantitative Easing’ (bond or asset buying to shore up a market or asset-class and manipulate interest rates), it will be because some asset is collapsing and it’s an emergency or if it looks like medium term deflation is likely. Things like high unemployment don’t really factor into our decision-making”.
So in the previous Draghi quote had him indicating that ‘something’ would be done if the deflation specter arose, and then in this quote he seems to be indicating ‘medium term’ deflation is what will get the ‘quantitative easing’ going. So is short term deflation ok? Will a rate cut do the trick? Negative ‘overnight’ rates? We’ll see.
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In July 2008, the currency’s rise to an all-time high of $1.60 did not trigger an ECB response, even though euro zone finance ministers tried to talk down the currency. But inflation was near an all-time high at 4 percent, serving the ECB’s need to keep price growth in check.
JAPAN’S PAINFUL EXAMPLE
In a rare move for the usually soft-spoken Japanese, Finance Minister Taro Aso — drawing on Japan’s own experience of a protracted period of deflation — directly warned the euro zone about the dangers of falling prices.
“Based on our experience, once a deflationary mindset takes hold, it is easy to fall into a vicious cycle, whereby people start to postpone consumption and investment, leading to further deflationary pressures,” he told the IMF panel.
There are striking parallels between 1990s Japan and the euro zone’s plight now: weak bank lending, fragile economic growth, a rising exchange rate, and the central bank’s insistence that deflation is not on the horizon.
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Ouch. When Japan is lecturing your central bankers about repeating their deflationary mistakes your central bankers have clearly already made a large number of deflationary mistake. Yes, the self-made tightrope acts that the ECB has created for itself is something to behold. By emulating Bundesbank-style policies and basically taking “quantitative easing” off the table (until now, sort of), the ECB has created an unnecessary tension between a falling euro (which is helpful for the ailing eurozone economies) and the need to shore of the sovereign bond markets of those same ailing economies. Foreign bond investors may not be enthused about a depreciating euro in a stagnant economy because that might depreciate their euro-denominated sovereign bonds and yet a lower euro is exactly what is need to stimulate exports.
A Rising Euro is Good For Low Yields. Low Yields Aren’t Necessary A Good Thing.
If the ECB was a normal major central bank it could buy sovereign bonds up itself and fight against a falling euro translating into falling bond prices. That’s what quantitative easing allows, policy flexibility like buying sovereign bonds to stabilize that critical bond markets. And when you’re a huge bank like the ECB, you have major clout to do that extensively. Not doing so is a choice. It’s not mandated by the markets. But that quantitative easing option has always been effectively off the table ever since the financial crisis started. And then we get stories like this:
Bloomberg Businessweek
Low Bond Yields in Europe Could Signal Deflation
By Peter Coy, Craig Stirling, and Mark Deen April 10, 2014News flash: Spain is now able to borrow almost as cheaply as the U.S. Yes, Spain, a nation with 26 percent unemployment, red ink in the national budget, and an economy that has shrunk in 17 of the last 23 quarters, has five-year government bond yields of just over 1.7 percent. Italy’s borrowing cost is only un po’ più elevato. Even Portugal has a government bond yield merely a percentage point higher than that of the U.S.
Now for the asterisk, because things are never simple in Europe. It’s unquestionably good that the peripheral nations of Europe have stepped back from the brink of default, emboldening investors to accept lower yields on their government bonds. The problem is that the very austerity measures that lessened the risk of default may have contributed to a new danger in Europe: deflation. To use a metaphor from Greece, whose government borrowing costs have also plunged, Europe managed to steer clear of the rocks of Scylla only to head for the whirlpool of Charybdis.
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It’s not really the case that the austerity measures “lessened the risk of default” as described above. They exacerbated the situation by sending the economies into depressions. The particulars varied by nation, but when “default” was an issue, it generally involved bailing out some big domestic banks which were typically ailing due to the impact of austerity and the plummeting value of the sovereign bonds the banks held. This bank bailouts would in turn allow them to buy sovereign bonds and keep the sovereign bond market from completely collapsing. But it came at the cost of the ‘Troika’ coming in and imposing austerity to pay for the bank bailouts. And the cycle would begin anew.
The ECB also started buying sovereign bonds on the secondary markets in order to stabilize the situation in 2010, although these have been only large enough to keep crises contained.
Another important turning point that helped avoid default in was Draghi’s introduction of the possibility of unlimited bond buying back in September 2012. This was during one of the previous periods of crisis when it looked like Spain was going to implode. Because the bond markets actually want the ECB to act like a normal central bank — and not the weird Ordoliberal experiment that it actually is — the impact of that yet-unfulfilled promise to buy bonds directly was muted by the real world impact of the austerity measures. But it helped. Promises to help (without actual help) can sometimes still help. Especially when you’re a central bank.
The rising value of the euro has also clearly helped deflate concerns over defaults because investors that bought the “periphery” bonds have been making out like bandits this year. And it’s the rising euro that’s been a big part of that rally. And, of course, market expectations that Draghi will finally be forced to do quantitative easing — because all of the policies so far have push the eurozone to the brink of deflation — have also been fueling the strong bond rally all year. The bond rally is rooted in expectation that things are only going to get worse and the ECB will be forced to act.
And then there were the three-year “LTRO” loans the ECB made to eurozone banks in 2011 and 2012 that help pump over $1 trillion euros into the financial system while austerity policies remained in place. The banks swapped collateral, like asset-backed securities, with the ECB for fresh cash. As we’ll discuss later, in June of 2012, the rules for that collateral were dramatically relaxed to allow for toxic asset-backed securities (like mortgage backed securities or auto loans or possibly corporate debt) to get swapped for cash. So that was certainly helpful, although mostly to the banks.
The austerity measures did help in the technical sense that they dramatically reduced government spending. But that successful intervention in sovereign bond markets came at the cost of bludgeoning the economies and gutting their long term potential. That’s why we have record high unemployment in the ‘periphery’ with still very high debt levels and record low sovereign bond yields.
Overall, the ECB’s toolkit for emergency responses to a crisis is simply to wait for a crisis to erupt in a country’s sovereign bond markets, which will manifest as a big domestic bank imploding or something, and then bail out the bank, intervene in the markets just enough to avoid a larger crisis, and impose austerity to pay for it. That’s basically the ECB’s policy response: be reactionary, wait for a crisis, intervene in the bonds markets and banks, and then austerity. Proactive stimulus is always off the table.
This is the kind of policy you get when you pursue the Bundesbank’s gold-standard-lite ambitions in your economic union. A bunch of bankers get rich and the golden goose gets traumatized. Mindless austerity doesn’t help.
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Past a certain point, falling interest rates go from being helpful to a little scary. An extremely low interest rate can signal that investors have no faith in a country’s ability to grow on its own and that they expect central banks to keep official rates super low for a long time to gin up economic activity. One thing that continues to depress European economies is fiscal policy: the combination of spending cuts and tax increases that helped governments prove they were serious about balancing budgets and winning back investors’ confidence.The debate over whether Europe’s austerity was too harsh may never be settled, but it’s clear that the euro zone as a whole hasn’t been able to climb out of its rut. Its inflation rate slowed to 0.5 percent in March, the lowest level in more than four years. That’s well below the European Central Bank’s inflation goal of just below 2 percent. In Japan, cycles of economywide price declines known as deflation have been endemic since 1990. When prices fall, debt burdens become heavier, and companies and consumers are afraid to borrow. Low interest rates on government bonds don’t help. “The euro zone faces a creeping danger: the risk that allowing inflation to run so far below the ECB’s own definition of price stability for so long will eventually topple the monetary union into outright deflation,” wrote Janet Henry, chief European economist of HSBC (HSBC), in a note to clients on April 7.
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Regarding the statement “The debate over whether Europe’s austerity was too harsh may never be settled, but it’s clear that the euro zone as a whole hasn’t been able to climb out of its rut”, a major reason the debate over whether or not Europe’s austerity was too harsh may never be settled is because the debate over Europe’s austerity is in a rut. An undead rut. That’s why the debate never ends and why Paul Krugmans columns on the eurozone have become so timeless. The situation never seems to change!
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In France, five-year government borrowing costs are 0.9 percent, which is well into dangerous territory. French President François Hollande is trying to get permission from the European Union to slow the country’s deficit-reduction effort, which he believes is partly responsible for France’s economic weakness. The country hasn’t had growth of 1 percent or better since 2011. He dispatched two ministers to seek the support of their German counterparts on April 7.
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Note that France has a 0.9% borrowing cost and hasn’t grown more than 1% since 2011 and it has to go to Germany to get EU permission to engage in stimulus spending instead of just using record low borrowing rates to stimulate its economy? That’s kind of messed up.
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Interest rates fall when the demand for funding is weak because of a big “output gap,” the slack between what the economy is capable of producing and what it’s actually putting out, says Angel Ubide, a senior fellow at the Peterson Institute for International Economics in Washington. Believers in austerity argue that stabilizing government finances will give businesses the confidence to expand, shrinking that output gap, but it’s a painful process, says Mauro Guillén, director of the Lauder Institute at the University of Pennsylvania in Philadelphia. Speaking mainly of Spain, he says: “Of course the austerity measures will eventually work, but it’s going to take them a long time.”
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See that? Even austerity advocates acknowledge that “of course the austerity measures will eventually work, but it’s going to take them a long time.” As you can see, Europe’s Lost Generation is being lost casually. Yikes.
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Speculation is a big factor in the latest decline in bond yields in Spain, Italy, Portugal, and Greece. Bond prices rose another notch—and yields fell—after ECB President Mario Draghi said on April 3 that the central bank was considering unconventional, i.e., more extreme, measures to stimulate growth and stave off deflation. He said the bank’s Governing Council was “unanimous” on exploring tools including purchases of debt, a European echo of the Federal Reserve’s quantitative easing (QE) program.
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Notice the point made here: “Speculation is a big factor in the latest decline in bond yields in Spain, Italy, Portugal, and Greece. Bond prices rose another notch—and yields fell—after ECB President Mario Draghi said on April 3 that the central bank was considering unconventional, i.e., more extreme, measures to stimulate growth and stave off deflation”.
What does that say? Again, it says that the bond markets want the ECB to engage in quantitative easing. That’s what’s been driving the rally in eurozone bonds this year: expectations that the ECB has to step in and do something before deflation takes hold. That’s why there’s record low interest rates for Greece, Ireland, Italy, Portugal and Spain. Yes, Greece is issuing bonds again even though its economy is still a mess with a higher debt load than when the crisis started and 25% unemployment. Yay. But the market interest in those bonds isn’t driven by a sense that the fundamentals are getting better. It’s driven by a conviction that the ECB will eventually have to pay the piper and go down the QE path. If you’re a bond holder, QE potentially involves the ECB buying your bonds.
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But quantitative easing wouldn’t be as easy for Draghi to carry out as it has been for the Fed. The ECB’s founding treaty prohibits it from financing governments, which is essentially what a central bank does when it buys government bonds. Even if it got around that rule, the ECB would have to make politically fraught decisions about which countries’ bonds to buy. To avoid that issue, it might instead buy private debt securities such as mortgage-backed bonds. “If you think the ECB is about to launch a meaningful QE operation, you’ll be disappointed,” wrote Erik Nielsen, UniCredit’s (UCG:IM) chief global economist, in a client note on April 6.If the ECB succeeded in its mission to stimulate the European economy, interest rates would go up, not down. Stronger growth would increase the demand for loans, and inflation would pick up, both of which would raise the rates lenders and bond buyers demand to let go of their money. So when interest rates fall, it’s a sign that investors expect the ECB to do a lot more to get growth going—and, at least initially, to fail. That, in a nutshell, is why the news flash out of Madrid is not entirely good news.
Notice the key point made at the very end: “So when interest rates fall, it’s a sign that investors expect the ECB to do a lot more to get growth going—and, at least initially, to fail. That, in a nutshell, is why the news flash out of Madrid is not entirely good news”. Again: The record low interest rates we’re seeing across the eurozone and especially in the most austerity-wracked countries are not driven by confidence the the ECB is going to turn the economy around. They’re driven by the bond market’s growing confidence that the ECB has messed things up so badly that an extended period of ultra-low rates and eventual ECB bond buying will have to happen in the future. It’s an extended ‘Doomsday’ play that’s driving this rally in the bond markets. That’s not a sign of confidence.
And why, again, hasn’t the ECB engage in quantitative easing yet? Ah yes, because “the ECB’s founding treaty prohibits it from financing governments, which is essentially what a central bank does when it buys government bonds”, and there is no way that is changing with present day attitudes (in particular, the Bundesbank’s attitude). This is especially after the Germany Constitutional Court’s ruling that maintained ‘doubts’ over the ECB’s proposed unlimited bond buying proposals.
Weidmann’s loophole
Sure, last week even Bundesbank chief Jens Weidmann has suddenly opened his mind to possible future sovereign bond buying by the ECB. But, technically, he’s only open to the idea in the future if government bond buying found to not be in violation in EU law. So, in reality, Jens Weidmann and the Bundesbank are probably not very open to future sovereign bond buying:
Financial Times
March 25, 2014 6:35 pm
Bundesbank hawk signals backing for QEBy Claire Jones in Frankfurt
One of the biggest barriers to the European Central Bank buying government bonds to save the eurozone from deflation was removed on Tuesday, after the head of Germany’s Bundesbank offered his first sign of support for quantitative easing.
In a radical change of stance, Jens Weidmann, the Bundesbank president who is viewed as the ECB’s policy hawk, said a QE programme was not “generally out of the question”.
While he was clear he would prefer purchases of private-sector assets to government debt, he signalled he could back sovereign bond-buying if it conformed with EU law, which prohibits the financing of governments by its monetary authority.
“It should be clear that my assessment [of whether QE violates EU law] will be a strict one,” he told the financial news service Market News International. “Buying not just peripheral bonds but German and French ones as well does not automatically solve the problem of monetary financing.”
Neither Mr Weidmann nor the bulk of the ECB’s rate-setting governing council are likely to call for buying public or private-sector bonds just yet. But the Bundesbank chief’s remarks indicate Mario Draghi, ECB president, could push through QE without alienating the eurozone’s economic powerhouse – should the risk of a bout of Japanese-style deflation heighten.
Mr Weidmann had in the past objected to the ECB buying government bonds. He was the only policy maker to vote against its “outright monetary transactions” programme, through which it can buy potentially unlimited quantities of sovereign debt.
Now, with the ECB grappling with inflation of less than half its target of just below 2 per cent, the Bundesbank president appears to have softened his position. Ken Wattret, an economist at BNP Paribas, said: “The comments sound somewhat more open-minded to the idea of additional policy action from the ECB, including unconventional measures, though with little sense of urgency.”
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Notice that Weidmann was the only policy maker to vote against the “outright monetary transactions” program. That’s the pledge to engage in “unlimited bond buying” that Draghi made back in 2012 if the situation got worse. And it’s that unlimited bond buying potential (which is normal for a major central bank) which the German Constitutional Court has lingering doubts over. So even if Weidmann eventually accepts the idea of unlimited sovereign bond buying for the ECB, it might be moot if Germany’s court doesn’t agree.
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Low eurozone inflation has stoked calls for the central bank to buy government bonds and embark on other unconventional policy options, such as negative rates on deposits parked in its coffers. The ECB has so far parried the calls, opting to keep policy on hold earlier this month despite unveiling forecasts showing inflation would remain well below its target the year after next at 1.5 per cent.Mr Weidmann made clear the current policy stance was “appropriate”. And even if the risk of a bout of falling prices rose substantially, he indicated the ECB would have to buy a host of assets, including not just the bonds of governments but also private-sector securities, to win his approval.
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And then there’s that last demand by the Bundesbank: In exchange for sovereign bond purchases, It also has to include other types of bond purchases. Keep in mind that there’s nothing wrong with buying a mix publicly and privately held bonds.
QE Isn’t Just About Government Bonds
But what if the plans ends up being only privately held bonds and no sovereign bonds at all? Is that possible? Yes. It’s not just possible. It’s what the eurozone’s central bankers are now calling for as the detail of their plans continue to dribble out. Asset-backed security purchases (and no government debt buys) is what the ECB really has in mind:
12:12 pm ET
Apr 11, 2014
The Wall Street Journal
central banking
ECB’s Nowotny: Additional ECB Easing Steps ‘Clearly Possible’By Brian Blackstone
Fresh stimulus measures from the European Central Bank are “clearly possible” to guard against the risks of excessively low inflation, but the bank should wait until its June meeting to consider whether to take them, Austrian central bank governor Ewald Nowotny said in an interview.
Mr. Nowotny, who is a member of the ECB’s governing council, signaled that his preference would be for any ECB stimulus to be geared toward Europe’s asset-backed securities market, which may in turn boost the flow of credit to the economy. He said he is open to setting a negative rate on bank deposits parked at the ECB, but raised doubts about the effectiveness of such a move.
“We are preparing all the technical aspects of a range of possible interventions,” Mr. Nowotny told The Wall Street Journal on the sidelines of meetings of the International Monetary Fund.
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One possibility if the central bank does act, Mr. Nowotny, said, would be for the ECB to purchase asset-backed securities in the capital markets, a move that could help kick-start this segment of the markets and help steer more credit to the private sector.
The asset-backed securities market is much smaller in Europe than it is in the U.S., making it difficult for the ECB to purchase large amounts of these securities. But the signaling effect from the central bank could be significant even if the amounts of the purchases aren’t, Mr. Nowotny said.
“Even if the volumes may be not that large, I think as soon as the ECB announces that they are prepared to become active in this market, market participants would have a huge incentive to provide material for this market,” he said.
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Note the statement by Austria’s central banker Ewald Nowotny, who’s preferences for asset-backed securities purchases over sovereign bond buying is what Draghi also has in mind: Even if the volumes may be not that large, I think as soon as the ECB announces that they are prepared to become active in this market, market participants would have a huge incentive to provide material for this market.
That translates to “Banks are going to be willing to sell the ECB asset backed securities despite of there not being many asset-backed securities out there because the ECB’s buy is going to jack up the prices so much banks won’t be able to resist selling”.
There’s nothing intrinsically wrong with this aspect of the plan. This is a potentially reasonable way to inject cash into banks. It’s the fact that this is the only plan the ECB apparently has in mind that’s wrong, especially since it’s unclear how much extra cash for eurozone banks is really going to help economies with record high unemployment. Maybe the governments have better used for it.
Well, ok, buying asset-backed securities (ABS) isn’t the only part of the plan. There’s also talk of negative ‘overnight’ interest rates to try to force banks to take back more of all that cash they have parked with the ECB, although Mr. Nowotny didn’t seem as confident in the idea as Weidmann.
And yet all this talk we hear about maybe allowing ‘quantitative easing’ — with the imlpicit idea that government bond purchases are coming (remember the incredibly bond rally this year) — is now turning into QE for only asset-backed securities. No government debt. In other words, stimulus through government spending is still being shunned. But stimulus by private sector debt? That’s fine!
Looser Money? Eh. Looser Credit Standards? Sure! Just as Long as No Government Debt is Involved
And then there’s the other new big development the ECB has in mind: Dramatically expanding the size of Europe’s asset-backed securities market by loosening lending and securitization standards. When the ECB loans to governments in the midst of a depression that’s very problematic. But relying on consumer debt to fuel the recovery and lowering those credit standards to achieve that goal is seen as sound policy. Will this help consumers? Maybe, if they want to take out a loan in the middle of a quasi-depression. But the banks should love it no matter what happens:
Bloomberg Businessweek
ECB Unites With BOE in Call to Ease Asset-Backed Bond Rules (1)
By Jennifer Ryan, Jana Randow and Alessandro Speciale April 11, 2014The European Central Bank and the Bank of England said regulators must support and promote the asset-backed bond market, ensuring that rules to safeguard the financial system don’t unnecessarily impair the securities’ use.
Officials “responsible for the regulatory treatment can change incentives to participate in the ABS market,” the central banks said in a joint paper published today. “It would be important that the authorities seek to ensure that new regulations at global and EU levels do not act to the detriment of the securitization market.”
...
Here’s a translation for “Officials ‘responsible for the regulatory treatment can change incentives to participate in the ABS market’ ”.
“We’re making it more profitable for the banks to get into the asset-backed securities market because banking profits are the foundation of this economy”.
Continuing...
...
The European Union’s 1.5 trillion-euro ($2 trillion) asset-backed securities market has taken center stage as ECB President Mario Draghi considers a plan to ward off deflation through quantitative easing. Policy makers have pushed to make it easier for banks to create the debt, putting them at odds with international regulators wary of complex products because of the role they played in the global financial crisis.Today’s paper said rules to address shortcomings in the assets revealed by the turmoil may be “unduly conservative.” The statement was prepared for central bank officials and finance ministers from the Group of 20 nations gathered in Washington for an International Monetary Fund meeting. It assesses the current state of the market in the EU, and says a “longer, more substantive” joint paper will be published in May.
...
Wait, what? The IMF is at odds with the ECB’s new plan to save the eurozone by by deregulating the asset-backed securities market and getting rid of ‘unduly conservative’ regulations. That’s probably not a good sign.
Continuing...
Bigger Pool
Draghi signaled last week that ECB policy makers are discussing a QE program that may include a mix of public and private debt. That would bolster a market he once described as “dead” and help rekindle euro-area lending that has been contracting for almost two years.
“The ‘high-quality’ segment of the securitization market should aim to be more resistant to market stress, thereby providing banks with a resilient form of funding,” according to today’s statement. “But it is also important to support more junior tranches of safe and robust securitization,” and officials should improve availability of data and analytics to improve standards and broaden the investor base, it said.
...
Again, note that there isn’t really any indication that the ECB is seriously looking at public debt(sovereign bonds). That’s just happy talk for now. It’s all private debt via ABSs for the foreseeable future given these kinds of signals.
Also note that when the official says
“But it is also important to support more junior tranches of safe and robust securitization”
what he’s really saying is
“The plan is to get the banks to ‘securitize’ a lot of new asset backed securities so the riskier ‘junior’ assets need to be made easier to package and sell to the markets”. That’s why standards have to be loosened. Growing the eurozone ABS market is clearly part of the plan. Is that a good plan?
Continuing...
...
Draghi told reporters on April 3 at his monthly press conference that the ECB could access a bigger pool of securitized bank loans if only there was a more liquid market in which to do so. The total stock of outstanding loans in the euro area was 17 trillion euros at the end of 2013, according to ECB data.Smaller Market
“If we are able to have these loans being correctly priced and rated, and traded, like it would happen, like it used to happen in the ABS market before the crisis then we naturally have a very large pool of assets,” Draghi said.
ECB Vice President Vitor Constancio reiterated the idea yesterday in Washington.
“Private assets will be included in any decision that may be taken” on QE, he said. “That would make a slight difference with other policies in other central banks.”
The 1.5 trillion euros of outstanding ABSs in the EU is about one quarter of the size of the U.S. market, the document shows. Since its peak in 2009, the outstanding amount in the EU has decreased by a third, or 750 billion euros.
Sales of asset-backed securities fell to $102.5 billion in Europe last year, down from $449 billion in 2007 and less than the $174 billion of issuance in the U.S., according to data compiled by JPMorgan Chase & Co. Many of the ABSs created by euro-area lenders are pledged as collateral against central-bank liquidity, and so would be unavailable for any ECB purchase program.
...
When Draghi says says “If we are able to have these loans being correctly priced and rated, and traded, like it would happen, like it used to happen in the ABS market before the crisis then we naturally have a very large pool of assets”,
he’s saying
“I want to go back to rules back to the bubble era rules”.
And when Draghi says
“Many of the ABSs created by euro-area lenders are pledged as collateral against central-bank liquidity, and so would be unavailable for any ECB purchase program.”
this is a reference to one of the other rare instances when the ECB actually did something helpful: In June of 2012, when Spain was teetering, the ECB loosened the rules for the collateral banks could use as collateral in exchange for an emergency loan. This allowed banks to basically temporarily swap out the toxic underwater asset-backed securities sitting on their balance sheets for cash that banks can use for other purposes. This rare, helpful move was, of course, vigorously opposed by the Bundesbank.
Contrast that to the current plan, which is basically the opposite of the above scenario(and which the Bundesbank is not opposing): All those asset-backed securities still parked at the ECB as part of the $1 trillion LTRO 3‑year loan program are going to mature this year or next year. So eurozone banks are going to have growing stockpiles over the next year of the ABSs that they used as collateral 2–3 years ago. That’s probably part of what this scheme is preparing far: What to do about the return of the LTRO collateral? And the answer is “fuel a consumer debt boom”. Extending another round of LTRO’s could conceivably happen but it sure look like the ECB and Bundesbank would prefer the “consumer debt boom” approach.
Again, there’s nothing inherently wrong with the ECB shoring up the ABS market. These things depend on context, and stimulating the ABS market can fuel consumer loans which the eurozone economy could certainly use. Some of these ABS purchases by the ECB for QE could be used for financing small and medium-sized business loans and that could certainly be helpful. Moving all those asset-backed securities out of the ECB, into a new growing ABS market, and then back onto the ECB’s balance sheet (via the QE) is a pretty clever way to clean up banks’ balance sheets if it works!
But, of course, the eurozone economy could also use consumer demand and in the larger context (austerity policies) the prospect for surging consumer demand (which is sort of required for this scheme to work) are not very promising. Unemployed people don’t take out consumer loans. And NOTHING in the ECB’s plan or the large EU’s plans really seem to address this. Recall how France has the crawl to Berlin to get permission to ask the EU if it can borrow at 0.9% rates to engage in government stimulus spending. THAT’s what would help demand. France borrowing and spending. And that, of course, is just not something the eurozone allows. At least not thus far.
The other way this plan could potentially (in theory, but not realistically) help the situation is if growing consumer credit in the wealthier ‘core’ nations like Germany translate into more imports from Greece or Spain or Italy? Because, at the end of the day, the eurozone ‘periphery’ needs more exports if their economies are going to heal. So that’s how a plan like this could work, but is there any reason to believe that’s going to be the case?
And what happens if there is a real credit boom that results in more consumer spending but the austerity policies are still in place? As the argument goes, the ABS market is tied more closely to the economy than other assets so if you can stimulate ABS lending your also promoting things like mortgages and auto-loans and actual consumer goods. And there’s nothing wrong with that...unless the rest of your policies promote austerity. Why? Because the same economic boost you get from ABS lending turns into a bust if those loans go sour because people go broke. That’s part of what triggered the 2008 financial crisis in the first place. The ABS markets, especially the mortgage markets in the US, imploded. Let’s hope the eurozone learned a lesson there.
Continuing...
...
Too PunitiveAndy Haldane, the BOE’s executive director for financial stability who will become chief economist from June, said earlier this month that the institution intends to “support actively” initiatives internationally for ABSs and in Europe to design securitizations that would fit in this new class.
“If successful, the prize for regulators and asset managers is a big one,” he said.
“The regulators have been particularly punitive on ABS due to the experience of the crisis, but there is a growing appreciation of the merits of securitization because it provides a direct link to the real economy,” said Ruben van Leeuwen, an analyst at Rabobank Groep in Utrecht. “It can help fund mortgages or auto loans, which is especially important now with bank funding channels blocked.”
...
Did you see that admission by the Bank of England’s upcoming chief? This plan “If successful, the prize for regulators and asset managers is a big one”. Somehow it seems like the asset managers are going to make out better than the regulators under this deal. When the going gets tough in the eurozone, the ECB gets weird and clingy with the banks and then reality gets weird and awful. That’s what happens when your central banker puts on Ordoliberal blinders. Welcome to planned stagdeflation and enjoy the weird, awful ride. We have record high unemployment in countries with record low bond yields and the ECB’s response is to stimulate a consumer loan binge while still sticking to austerity. Amazing!
If this feels familiar, it should. And yet it keeps getting weirder. It’s almost awesome in how dysfunctional it is.
And like so much of what emanates from the ECB, it’s only sort of surprising and we should have probably expect policies like this by now. Because the one real policy of the ECB is quite simple: It’s the Field of Dreams approach. Bankster dreams. And the Bundesbank’s dreams. And Sovereign Bond Holder’s dreams, although they might be disappointed with ECB never expands it QE to those sovereign bonds. People who detest the idea that government could be of use during a time like this would also find this situation kind of dreamy. That’s seriously the ideology at work here.
That Light at the End of the Tunnel is Getting a lot Closer, and We’re Not Moving...
Wait, but what’s this? Could there be an end to austerity around the corner?
Well yes, the Netherlands, an early staunch supporter of austerity, has had enough. Austerity in the Netherlands has got to go:
The Wall Street Journal
Meeting EU Deficit Target, Netherlands Freezes Austerity
Finance Minister Jeroen Dijsselbloem Says Budget Deficit Will Stay Below 3% of GDP in 2014 and 2015Updated April 11, 2014 2:50 p.m. ET
AMSTERDAM—Dutch Finance Minister Jeroen Dijsselbloem on Friday said he sees no need for additional austerity in the coming years as the Netherlands continues to comply with European Union budget rules.Mr. Dijsslbloem said in a letter to Parliament that the country’s budget deficit will stay below the EU threshold of 3% of gross domestic product in 2014 and 2015. As a result, the government “won’t implement additional austerity measures,” he said.
The Netherlands, a staunch supporter of budgetary discipline throughout the crisis in the euro zone, for years struggled to comply with the budget rules due to a weak economy at home and a public backlash against austerity.
The recovering economy and recent improvement in public finances suggest that the euro zone’s fifth-largest economy is slowly drawing a line under years of unpopular belt-tightening.
In 2013, the deficit was below 3% of gross domestic, marking the first time in five years that the Netherlands was compliant with the EU rules.
Could happy days be here again? Happier days could be here for the Netherlands, but is it a sign that the ECB is and the broader EU and eurozone community is going to lay off the austerity madness? After all, if ever there was a time to end the austerity madness it would be right now when the ECB is trying to trigger a consumer debt boom. So is change in the air?
Well, that’s difficult to say because the Netherland did meet its deficit targets and therefore technically the Netherlands is able to ditch the austerity, for now, without breaking the EU deficit rules. So this wasn’t necessarily a sign that the general austerity policies are shifting. Nothing changed except the fact that the Netherlands finally eeked past the 3% deficit goalpost and immediately declared “enough!”.
Also, Angela Merkel was just in Greece doing a “victory lap” of sorts after Greece, with over 25% unemployment, successfully reentered the bonds markets for the first time since it was thrown into the eurozone’s doghouse. She had a few choice words about the austerity policies Greece should expect:
Merkel, In Athens, Praises Greek Reform Progress
by The Associated Press
April 11, 2014 2:03 PM ETATHENS, Greece (AP) — Greece won praise Friday from German Chancellor Angela Merkel — the lead advocate of eurozone austerity — for its painful economic turnaround and successful return to markets.
But Merkel added a polite reminder that the bailed-out country still wasn’t out of the woods.
“Greece has honored its pledges,” Merkel said at a news conference with Greek Prime Minister Antonis Samaras in Athens. “I hope that policy is continued.”
Merkel’s brief visit, her second since Europe’s debt crisis erupted in Greece more than four years ago, came amid Greek government euphoria over the country’s successful re-entry to international bond markets on Thursday. The landmark five-year issue was Greece’s first since 2010, when it was saved from bankruptcy by a massive bailout from its European partners and the International Monetary Fund.
...
Merkel remains a divisive figure in Greece because of her insistence on economic pain. During a visit in 2012, she was greeted by mass anti-austerity protests that turned violent, and about 5,000 police officers were deployed Friday to guard areas on Merkel’s itinerary and enforce a ban across most of central Athens on planned protests.
Security was tightened further after a powerful car bomb exploded early Thursday outside the Bank of Greece, causing damage but no injuries. No group claimed responsibility, but police suspect domestic anarchist militants.
About 1,000 people held peaceful demonstrations outside the prohibited area, but dispersed under heavy rain.
The austerity measures that have helped stabilize public finances have exacted a horrifying social toll. The economy has shrunk by about a quarter during the crisis and unemployment is near 27 percent.
“I believe that after all these necessary reforms have been carried out — with more remaining — that Greece will have more opportunities than difficulties,“Merkel said at the start of her visit.
...
Meanwhile, Fitch ratings agency warned the successful bond issue didn’t mean an end to Greece’s financial problems. In a report Friday it said the issue showed the country’s progress but doesn’t mean it will be able to finance itself on its own when the bailout program ends later this year. It also highlighted risks that political support for reforms might wane.
“Greece has honored its pledges...I hope that policy is continued.”
“I believe that after all these necessary reforms have been carried out — with more remaining — that Greece will have more opportunities than difficulties,”
Oh dear. So it’s a continuation of policies as they stand which means austerity for basically everyone. Except the Netherlands and Germany. Plus asset-backed securities. Oh, and there’s the one other part of the plan. The negative interest ‘overnight’ interest rates that the Bundesbank would prefer get implemented before and QE at all takes place. That’s basically the plan going forward to boost the eurozone: Eurozone banks are going to be super incentized to package and sell asset backed securities in the hopes of dramatically expanding that market in time for the return of all the asset-backed securities that will get returned as collateral for the 3‑year emergency loans that expire will expire over the next year. The ECB then buys those new asset-backed securities, freeing up money for more loans. It’s a virtuous cycle. With government austerity that will maximize the likelihood that these new loans will sour.
Austerity and consumber debt. That’s the plan. Although the plan could change. There’s nothing stopping that. For instance, Mario Draghi just hedged a bit on the plan. First he acknowledged that the plan to focus on the ABS market alone in the QE really doesn’t make sense at the moment because the ABS market is just not big enough yet to be a meaningful source of stimulus for the eurozone economies, adding “We may need to consider other unconventional measures” without specify what those other measures might be.
Hmmm....what could he have in mind...
The Future: Technology, Theocracy and the Thousand Year Reich
Paul Krugman stumbled onto a somewhat ironic finding about the “Confidence Fairies”: For the Confidence Fairies to work their magic no one can criticize them:
It’s too bad the fairies the ECB prays to aren’t filled with more self-confidence. Then again, given what an incredibly avoidable mess that the eurozone has become in recent years, some of the ECB’s preferred fairies might be swooning with pride these days. After all, no one said the ECB has to only worship the Confidence Fairies. There are others...
Time journalist Michael Schuman wrote an great piece last year, “Karl Marx’s Revenge: Class Struggle Grows Around the World”, about the growing pressures of wealth inequality, joblessness, and globalization that are causing many around the globe to question whether or not Karl Mark’s critiques of capitalism had a point. It also discussed the growing backlash amongst the global elites against the spread of these sentiments.
Schuman has a new article Time out today, “Here’s How You Help the Poor Without Soaking the Rich”. And it does look like a plan that could partially work. While the plan probably won’t do too much to help the poor, it will indeed avoid a soaking of the rich...although their boots might get a little moist while the rest of us are licking them:
Stories like this are a reminder that the EU’s bizarre new strategy of basically praying at the Altar of the Businessman for any and all economic ills is a remarkably contagious and enduring idea even when it really shouldn’t be. In today’s world, Economic Stockholm Syndrome can potentially impact any society on the globe, rich or poor.
In related news, Stockholm really needs to do something about its Economic Stockholm Syndrome.
Researchers at Deutsche Bank published their own predictions on what we should expect from the ECB’s quantitative easing (QE) ambitions. The verdict? No sovereign bond/public debt purchases (unless all other options have already been tried) as expected. And in terms of the asset-backed securities (ABSs) the ECB might have in mind, the researchers are expecting a focus on buying asset backed securities tied to loans to small and medium enterprises (SMEs). So, to summarize via acronym abuse: It’s going to be SME ABSs for the ECB’s QE:
So is a focus on SMEs good news or bad news? As with all things ECB-related, the answer is “maybe, but even if it is helpful, it probably won’t be as helpful as it needs to be”. That’s just how things go with the ECB. But it still might be better than nothing, because with the EU’s banking “stress test” coming up the availability of corporate loans for small and medium sized businesses in the EU might get rather tight. And tighter credit conditions for business loans is the last thing the ‘periphery’ needs right now. That’s because it’s about to get ugly in the EU’s banking sector. The zombie-hunt is getting closer and closer...:
Zombie hunts don’t always involve a catch-22, but central banking and catch-22s are like peas in a pod since economic systems, in general, are filled with catch-22’s. It’s why central banks are potentially so useful and why treating an economy like some exquisite self-correcting machine is such a hopeless cause: Central banks get to pick a winning side in these inevitable catch-22 situations that would otherwise take “the long run” to resolve on their own. In this case, the catch-22 is the situation where “a bank that has made loans that aren’t being repaid may extend the loan or otherwise take it easy on a struggling borrower in hopes they’ll eventually pay. But that practice means the bank may not have money to make new loans”. In other words, the “zombie banks” are upholding the “zombie businesses” in the hopes that the business will find a cure for zombiiism and thus cure the banks too. And, in doing so, the zombie banks are preventing a further meltdown in the business sector (by forestalling cutting on the loans needed to keep the business alive), but at the cost of restricting credit to non-zombie businesses. That’s the catch-22.
There are different ways to resolve this catch-22, but the tried and true methods almost all involve the kind of government actions the ECB (and especially the Bundesbank) are ideologically opposed to. Government stimulus spending, for instance, could break this catch-22 by providing the cure for the zombie businesses. Sure, some business may not be viable even in a recovered economy, but many others are simply going to need a better economy to cure themselves of their zombie-status and government stimulus can be that outside force for triggering the healing process.
But, again, government stimulus spending is not an ideological option for the ECB. So, instead, we’re seeing a different kind of catch-22 resolution strategy. It’s the partial-catch-22 resolution: By buying up asset-backed securities targeted at the SME ABS market (or possible buying corporate loans directly off of banks’ balance sheets) the ECB is helping to decouple the fates of the zombie businesses and zombie banks under the hopes that the loosened credit conditions will cure both business and banks of their zombification. And with the EU’s banking stress-test coming up, this decoupling of the fates between banks and business will also allow for the shuttering of “bad banks” with that bleeding into the credit markets.
So the big plan now appears to be using the bank stress tests for a big “zombie-hunt”/cleansing in the banking sector involving the weakest banks getting shut down, with the ECB hoping to offload some of the inevitable credit stresses on the EU’s businesses resulting from the banking cleanup onto itself. The ECB will act as a kind of lifeline to the SMEs credit markets while the zombie banks are hunted down and killed and the ECB attempts to permanently expand the ABS sector for SME credit to larger ‘shadow banking’ market. Oh yeah, and the austerity policies continue. That’s the plan. Kill off the weakest banks. Strengthen the survivors. Keep business on a lifeline if possible. And continue the austerity that is preventing any real healing.
Will it work? Well, that will probably depend on the particulars of each economy. The relatively healthy German economy would probably benefit. But how about in a country like Ireland, where a large number of business are still saddled with large debts that they’ve never really been able to pay off? Will the ECB’s SME credit lifeline be enough to heal the zombie business or will it end up killing them too? As with all things involving the ECB, it remains unclear what to expect, but there will be blood. That’s all we get to know for sure.
It’s time for another ride on the ECB’s not-very-merry-go-round of unrealized action
Did you catch that? Draghi openly chided countries, France in particular, for trying to influence the ECB’s thinking by pointing out that the rising euro, currently at a 2 1/2 year high vs the dollar, is screwing up their economies. “We have received plenty of advice...We are independent, so people should be aware that if this might be seen as a threat to our independence it could cause long-term damage to our credibility.” Oh, ok, so eurozone member nations and other institutions can’t make their wishes known to the ECB because that might undermine its independence? Well isn’t that fascinating!
Every once in a while the Bundesbank has to remind the world that the years of depressed economies and mandated austerity weren’t some “oops!” accidental policy outcome. No, the Bundesbank just doesn’t think the eurozone’s near economic collapse was really all that big a deal because you can’t have “internal devaluation” without wage deflation and a general decline in incomes and living standards. Deflation is the goal:
And here’s a reminder that the Bundesbank isn’t the only major financial institution trying to deflate the future:
Gilded Age deflation: Again, that’s the goal. And how do we get there? By doing everything we can to keep doing nothing:
It can’t be pointed out enough: Notice how Jens Weidmann has wielded sole veto power over the ECB’s decision to “do whatever it take”. And notice how that veto power is effectively still in place (which is why articles about how momentous it is for Weidmann to “come in from the cold” are written the first place)
Continuing...
And notice how the Bundesbank doesn’t hide the fact that it is dedicated to the idea that a central bank should do NOTHING to promote economic growth and employement. NOTHING. And this is no secret.
Continuing...
Notice how Weidmann’s economic views — which have been the most extreme of the eurozone’s central bankers — is charactized as “Quite Pragmatic”. Why exactly? Who knows! Just pick a reason! It’s like justifying deflation...just pick an excuse and run with it. You can alway change it later!
Continuing...
“We are in a period of benign disinflation and price stability rather than entering a period of bad deflation”. That’s the view of the guy that quit his post as the ECB’s chief economist in 2011, along with ECB chief Axel Weber, in protest over the ECB possibly doing something about the financial crisis. And here we are, three years later and a lot closer to deflation, and Stark is still saying that he sees no problem and actually views this as a period of time of “benign disinflation”. And now we have the BIS pushing the idea that deflation isn’t actually all that bad because, hey, was the Gilded Age really that bad? We can’t say they didn’t warn us.
So you know how the ECB’s mini-QE strategy is to focus on encouraging banks to lend to consumers and businesses by facilitating the growth and sale of asset-backed securities (some of which would be purchased by the ECB)? It’s a strategy that inherently assumes that banks and the rest of the shadow banking system end up buying those loans bundled up as asset-backed securities (ABS) so it’s basically an approach that focuses on credit creation to fuel a recover using two key steps: 1. Banks issue the loans to the to private sector. And 2. Other banks and financial institutions then buy those loans as an ABS.
In other words, the whole ECB scheme centers around encouraging robust private sector lending to sectors to individuals and businesses that are currently lacking affordable credit or credit at all. And this is as opposed to public sector government spending in order to avoid the possibility of the ECB’s QE actually ending up financing governments and irking the Bundesbank. So the growth of private sector debt is a major component of the ECB’s whole gameplan going forward.
With that in mind, check out the ECB’s recent utterings on the banks and their willingness to purchase private sector debt:
So let’s see. According to the ECB:
1. A “continued global search for yield...has left the financial system more vulnerable to an abrupt reversal of risk premia” = if bond investors decide to move their money out the eurozone there could be problems in that sector. It’s the threat of the international “bond vigilantes”.
2. “Financial stress indicators have remained low and stable” = but we don’t actually see the threat of the bond vigilantes.
3. “Such flows might prove to be fickle, absent prospects of strong absolute returns differentiated by underlying country and bank-specific macroeconomic prospects” = One of the catalysts for the bond vigilante threat could be ongoing underlying problems in individual countries based on “country and bank-specific macroeconomic prospects” (i.e. how their economies are doing and the health of the financial sector).
4. “Continued action by sovereigns is needed to address public debt sustainability challenges -– notably progress in restoring the soundness of public finances while working to boost macroeconomic growth prospects.” = But governments need to continue the very austerity policies that are negatively impacting the “country and bank-specific macroeconomic prospects” anyways because that’s just how the eurozone rolls.
5. The ECB said that while euro-area banks continue to operate in a “low profitability or loss-making environment,” they must continue to work to “mitigate” investors’ skepticism while at the same time ensuring that the deleveraging process doesn’t “unduly” lead to a reduction in credit to the economy. = Low interest rates are hurting bank profitability, so bank had better deal with this although they also shouldn’t shink their portfolios too much because that remove needed credit for the economy to recover. Good luck trying to balance this to all the banks facing stress tests that will be forced to deleverage all summer long.
6. “Although some tentative signs of a leveling-off in the pace of non-performing loan formation have emerged in some countries, the turning point does not appear to have been reached yet” = BTW, the private sector loans in some countries are still getting worse.
7. “Amid continued downside risks to a fragile euro-area economic recovery, high private-sector indebtedness in many countries, coupled with only slowly improving income and earnings prospects, may weigh on borrowers’ debt servicing capabilities.” = If things continue as they are, borrowers might go broke.
In other words, what the ECB is telling us is that there could be a bond vigilante problem. Also, there are no observed problems. But there could be problems if negative underlying trends continue. Also, the austerity policies that are causing the negative underlying trends (and the chase for yield by the banks since other asset classes do poorly in a recession) must also continue. And the bank deleveraging must also continue too although banks should strive not to hurt their profits or restrict credit too much while doing so. And if things don’t change and these trends continue, all those bonds banks are buying might go sour which, obviously, would be really bad.
That’s basically what the ECB is saying.
With Germany’s economy barely showing any growth and the ECB lowering their medium term inflation outlook (with inflation now expected to reach 1.4% in 2016, well below the 2% target) the ECB finally pulled the trigger. No, not the Quantitative Easing trigger. The smaller Rate Cut trigger and, later this year, cheap loans to banks, but only to banks that can prove they are using the loans for lending to the public(so the weakest banks in the weakest economies may not benefit). We still might see QE, but not this year according to ECB officials because they’ll need to wait and see how well this current rate cut does at turning the eurozone economies around. So the big banking stress test is still on the way this year along with some rate cuts and loans later this year, but no QE:
In other news, more involuntary austerity is on the way. Much more involuntary austerity. It’s part of the new social contract. It’s a legal contract:
Ok, according to the definition of austerity used by Ireland’s ex-Finance Minister, Ireland doesn’t have more austerity on the way because what Ireland has been experiencing thus far isn’t technically austerity since Ireland’s debt has been rising. So the real austerity is yet to come...!?!?
Every once in a while an article comes along that inadvertantly summarizes a collective madness:
So let’s see...this respected think tank economist, Clemens Fuest, has a “bad feeling” about the ECB’s quantitative easing program (which won’t happen this year anyways while the ECB waits to see how its other measures work) because he’s super concerned that it will result in asset bubbles because the money being lent to banks so far isn’t trickling down to the real economy. And he’s convinced that there’s a 95 percent probability that a QE program will be launched because he doesn’t see the programs launched last week (rate cuts and a new loan program for banks) as being a sufficient stimulus.
Now, this isn’t an unreasonable analysis because it really is a giant waste to throw a bunch of a money at the banks without somehow ensuring that it actually stimulates the real economy. But what would Mr. Fuest prefer to see instead? Government stimulus programs that could immediately put that ECB money to work in the real economy? Nope. He apparently wants more “structural reforms” to “stimulate” local economies. That’s right, the widely read expert that is worried about the financial stimulus not translating into a real economic stimulus thinks that stimulus can best be achieved with more austerity. No one escapes the consensus of the damned (It’s sort of a hostage situation).
The ECB and Bank of England just took a stop closer towards “going it alone” and weakening asset backed securities (ABS) regulations below global standards (but only for “high quality” assets) as part of the planned ABS quantitative easing designed to stimulate credit for small and medium sized businesses:
So the plan appears to be for the ECB (and BoE) to create a “clearly defined category of high-quality ABS” and then give this class of assets a “more lenient capital charges for banks” than the Basel Committee of banking regulators (which sets the global rules for banks) has in mind. And if the Basel committee can’t “improve the regulatory requirements for ABS on a global scale” (by deregulation), the ECB and Bank of England might go ahead and take “a more European approach” by setting those lenient rules unilaterally.
And, of course, the Bundesbank opposes the plan, but not due to questions about its efficacy. No, the opposition is just in principle. Specifically, “first and foremost [stimulating the ABS market is] a job for the industry itself...One should not always call for the public sector to be in the forefront when it should be in the interests of the market itself to revitalise that”. It’s a reminder that the ordoliberalism pushed by the Bundesbank onto the eurozone is basically synthetic neoliberalism.
Still, there are reasons to be concerned about this plan. In addition to the inherent unknowns and catastrophic potential associated with financial deregulations, part of what makes this plan somewhat contradictory is that the whole idea behind the ABS QE plan is to make it easier for small and midsized business to access credit markets by making it easier for banks to issue ABS for small and mid sized businesses. At least that’s the claim. But at the end of the article we hear about how banks are worrying “that once a definition of ‘simple and transparent’ ABS is agreed then the rest of the market could be shunned by investors”. So you have to wonder just how much deregulating the “high-quality ABS” market will result greater credit for small and mid sized businesses since those smaller businesses are inherently riskier and their ABSs probably aren’t going to be “high quality”. For instance, last year, when the ABS market was experiencing a supply squeeze, it was the relative lack of high quality ABS products that was pushing investors into buying more of the riskier small and medium sized business ABS:
If “high quality” ABSs are get preferred regulatory treatment from the ECB and BoE, but the higher risk ABS don’t also get a similar regulatory easing, couldn’t that make the high quality ABSs relatively cheaper for investors while expanding their supply and possibly squelch the demand for the higher risk ABSs that are supplying small and medium sized businesses and achieve the exact opposite of the stated goals for ABS QE? It could work if the ECB buys more of those “high quality” ABSs as part of the QE plan than the banks end up creating, but isn’t that a pretty big “if”? This is the ECB we’re talking about.
Remember this from back in 2011?
The worst part about catastrophic stability? Things keep changing (for the worse). It’s just the reasons for why things are getting worse that never seem to change. So it’s very painful and very frustrating:
Wow. Krugman presents a paper to a bunch of central bankers suggesting that an aging populace and the “natural austerity” that goes along with it might be leading to a “new normal” of lower aggregate demand for much of the world and that central bank inflation “targets” that are higher than 2% might be the appropriate response to this “new normal” in order to avoided persistently negative real interest rates. In other words, the “secular stagnation” facing the eurozone could lead to a catastrophically stable situation, but only if we don’t adjust our policies to the new normal. And the responses from the central bankers appeared to be:
1. That higher inflation unfairly harms the poor (so let’s continue with the austerity in economies nearing deflation, right?)
2. A reference to Argentina (Yep).
3. If the ECB can’t get inflation to even 2% now, why bother raising the target higher?
4. And, finally, Mario Draghi chimes in “What would it mean for Germany to have a 5 per cent level? I wouldn’t want to think of that”.
Non-super low inflation as a means to address the secular stagnation associated with aging populations and demographic shifts?! NO NO NO NO NOOOOOOOOOOOOOOOOOOO! We’re all gonna die! That’s basically argument made by some of the most powerful and influential people on the planet.
Let’s hope the “dream team” talk in this article is just nightmarish speculation:
Keep in mind that the term “reform-minded” is being used here in place of “pro-austerity”.
Continuing...
Also keep in mind that Axel Weber resigned as head of the Bundesbank in protest over the ECB’s willingness to buy limited amounts of government bonds in crisis hit countries to prevent a downward spiral.
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Draghi as president of Italy and Jens Weidmann as head of the ECB. That’s the “dream team”, but it will require Italy’s president to leave office some time between now and 2019. The 88 year old president Giorgio Napolitano. *gulp*
And the beatings continue:
Yes, the guy that’s championed the notion of national “internal devaluation” — which lowers the costs of exports by slashing labor costs as the primary means of increasing “competitiveness” — just said “competitiveness cannot be brought about through a [currency] devaluation”. Apparently a “devaluation race” to the bottom can only take place with currency devaluations whereas races to devalue national living standards can never get too competitive and only creates winners.
And, while “a strong economy can also tolerate a strong currency”, what about weak economies stuck in a currency union that results in an artificially strong currency that makes their exports more expensive? Somehow that wasn’t addressed.
Continuing...
So if Weidmann “also appeared to dismiss potential purchases of other assets by the euro zone central bank,” doesn’t that basically rule out the ECB’s proposed purchase of asset backed securities next year? Uh oh. Although he does make a valid point at the end:
If banks are providing few loans in southern regions because “many firms (there) hardly demand fresh money due to the weak economy”, that would indeed raise questions about the effectiveness of the planned purchase of asset backed securities since the whole point of the plan was to make loans more accessible to small and medium sized businesses?
But, of course, it also raises the same old question of what can societies do when government stimulus is permanently vetoed by the Weidmann-faction, and a drop in the euro (to trigger exports) is also determined to be unnecessary? Oh yeah, society can just continue “internally devaluing” itself through austerity until its products get so cheap that rest of the world just can’t help but buy its products. It should start working any year now.
This is barely news at this point, but look who just came out against the ECB’s QE plans to buy asset-backed securities:
While the QE plan is rather questionable (due in large part to ongoing austerity regimes that will neutralize its effects), this story is a reminder that the Bundesbank’s ideology basically revolves around being a central bank that refuses to do the things central banks are supposed to do. That’s the supposed magic to Germany’s economic success according to Bundesbank lore, not the fact that Germany is a giant high tech manufacturing hub that plays a key a role in the global industrial supply chain. In the minds of the Bundesbank, Germany’s economic success is heavily reliant on the Bundesbank doing nothing and that model must now be permanently exported to the ECB. Nice work if you can get it.
FWIW, the IMF just told the ECB that not only should the ECB be engaging in QE, but it should be doing it via large scale government bond purshases. While it’s pretty much guaranteed that this suggestion will go absolutely nowhere due to Bundesbank opposition, the IMF should probably get brownie points for at least trying:
Touching on this topic, ECB Council member Ewald Nowotny recently stated that if the ECB can’t come up with a QE plan it can agree on by the end of the year it should just drop the idea of QE entirely. As Nowotny put it, “if we’re not able to come up with some kind of plan this year, the conclusion should be that, unfortunately, it is too difficult for Europe, given the material differences, and that it would make no sense...This is in Europe much more difficult than in the U.S. and the U.K. because of strong divergences, not least on the legal side.”
In other news, the confidence fairies of the marketplace don’t appear to have very much confidence in the ECB. Imagine that.
The good news: mainstream macroeconomists are overwhelmingly supportive of real fiscal stimulus policies when the economy needs it. The bad news: no one cares:
If a tree falls in the academic forest, but nobody in Brussels or Washington hears it, did it make a sound? Of course it does! It makes the sound of roots getting torn out (until Paul Krugman runs out of hair).
But even if DC or Brussels did hear a tree crying out “stimuuuuuluuussss!” as it fell, the term “stimulus” has just been redefined to include only monetary stimulus policies (i.e. loose money policies for the banks). And yes, those kinds of policies certainly have their place, but the kind of stimulus Krugman is referring to, where the government actually spends money making new investments in areas like infrastructure and research in order to stimulate the economy while doing useful things, has become completely unpersoned. The idea just isn’t discussed anymore. So whether or not policy-makers hear about the growing concensus amongst economists that the “stimulus” was helpful and needed, it’s probably not going to matter very much. Contemporary policy-makers only speak monetary-ese, and the term “stimulus” has a very limited definition in monetary-ese:
Yes, lending to companies and household, something that the ECB has identified as key impediment to the region’s recovery, shrank for the 26th consecutive month across the eurozone. So why don’t we all wait another half a year to see if the ECB should apply more monetary stimulus while also allowing the ongoing “expansionary austerity” policies work their magic too.
Uh oh:
Well isn’t that ominous.
Note that when the article states “However, cheaper government financing has acted as a disincentive to thorough-going economic reform that has prolonged the euro area’s low growth. The ECB now faces the hazard of engineering a further period of cheap money at a time when U.S. rates are about to rise,” this is only really true if you subscribe to the sadomonetarist school of economic thought that views debt money and debt as the center of the economy (as opposed to people trying to live) with little regard to the complexities of society’s needs or how economies actually function. It’s basically a form of economic religious fundamentalism and you would have to be kind of crazy to believe in it. Much like Jens Weidmann.
The ECB left interest rates unchanged last week and stands ready to continue doing nothing, as expected, but probably not as recommended given the circumstances:
“The public debt ratio jumped from 130.2pc to 135.6pc of GDP in the first quarter from a year earlier and will now rise again, despite austerity measures and a primary budget surplus.” This sounds like a job for more austerity.
Here’s another article describing how investors are scooping up assets in the eurozone based on the bet that the eurozone economy will do so poorly that that the ECB will be finally forced to do much more to stimulate the eurozone economy. So it’s like a vote of confidence in ECB incompetence but an eventual return to sanity:
And the eurozone continues to be boxed in by its own plans to push itself off a cliff and then wait and see what happens:
Notice how the idea of national governments using the record low borrowing costs to finance fiscal stimulus programs that could make investments in the future is still completely unpersoned.
Wolfgang Schauble once again reiterated his opposition to the suggestion by Mario Draghi last week that fiscal stimulus measure should be considered by creditor countries like Germany (and not the countries that most need it). Schauble’s argument appears to be that any additional government borrowing by member states would constitute government financing by the ECB and therefore be unconstitutional even though bond rates are at record lows without the ECB purchasing government bonds. Because that’s just how the eurozone rolls:
Notice how Wolfgang Schauble is arguing that eurozone members can’t engage in fiscal stimulus measures because that would violate the rule that the ECB can’t finance states even though governments can currently borrow at record lows rates without the ECB buying their sovereign bonds. It’s one of the unexplained quirks of the endless drive to send the eurozone into near deflation: borrowing costs are going to be low even for the ailing economies you send economies into a deflationary death spiral and the central bank is promising to “do whatever it takes”, and yet Berlin seems to always have one reason or another for why those low borrowing costs can never be used to by member states. It’s as if Schauble just assumes that all government spending is just guaranteed to be a giant waste of money that will become an ECB liability if the money to finance that government spending was borrowed as opposed to raised through taxes. It’s just a bizarre stance divorced from reality but it is what it is.
So, given Schauble’s interpretation of the eurozone’s rules, will eurozone member states will ever be allowed to engage in their own stimulus programs? Well, yes and no (with a lot less ‘yes’ than ‘no’). Yes, Schauble has in the past described a scenario where governments could potentially borrow from a shared pool of “eurobonds” that all nations are jointly backing. But, no, the individual governments themselves won’t actually get to make these fiscal stimulus decisions on their own, unless the individual governments happen to be powerful enough to effectively run the entire the EU. Because the system Schauble had in mind(as of July 2012) involved a tradeoff: governments can receive jointly-backed eurozone financing, but Brussels decides how much they get to borrow with veto powers over how they choose to spend it:
“But one thing is also clear: Those who want a strong Europe also have to be willing to surrender decisions to Brussels”. Yep! Well, ok, maybe not exactly Brussels...
The ECB made a splash today in the markets: a surprise rate cut and a declaration that it was the last rate cut, with the ECB’s quantitative easing plans (buying asset-backed securities) scheduled to commence at some point in the future. Germany opposed the rate cut and still opposes any QE and the details of the plan are to be released following the ECB’s October rate-setting meeting, so there are still a number of open questions about the scope of the monetary stimulus and the Bundesbank has plenty of time to water the thing down. Still, it’s better than nothing:
Note that when Draghi “reiterated that monetary easing must be combined with structural reforms”, that means the austerity is expected to continue. Also note that any real fiscal stimulus is completely absent from the plan. And when the article points out that ““the ECB had about 2.7 trillion euros of assets in January 2012, compared with 2 trillion euros now”, it’s a reminder that the ECB’s timid actions thus far (timid relative to the scope of the crisis) have been effectively sucking credit out of the eurozone economy for the past two years.
But at least it’s a start. The era of “don’t fight the ECB” might finally be around the corner. Unless, of course, the ECB completely blunders the entire QE plans by declaring in advance how much it will spend on assets. Especially if it’s not really enough money to significantly impact the markets. That would be unfortunate:
Well that was unfortunate. Still, 500 billion euros is better than nothing, even when the market knows the cap in advance,although hopefully some actual fiscal stimulus plans will get underway one of these years. Hopefully...
This is one of those “did some really have to do a study to figure this out” studies:
And, sadly, yes, someone really did need to do this study. Why? Because of influential figures like former ECB and Bundesbank official Jürgen Stark that still clearly feel otherwise:
Yes, according to Stark, there’s obviously been nowhere close to enough austerity in Europe and anything that doesn’t force more austerity now will just lead to long-term misery because only export-driven growth via lower pay for workers is allowable even though it’s impossible for all of Europe to become a global export powerhouse unless Europe economically conquers the world by mimicking China’s low-wage economic model (but a more extreme version) and the world doesn’t respond in kind with a global race to the bottom. Also, near deflation isn’t anything to worry about because, as Stark put it, a 0.3% inflation rate means “price stability reigns in the eurozone. This strengthens purchasing power and ultimately private consumption. The ECB has fulfilled its mandate for the present and the foreseeable future. There is no need for policy action in the short term.” So no more help by the ECB. Just more austerity. That should do wonders for the “purchasing power and ultimately private consumption” of the eurozone which will no doubt make everyone happy, especially the global poor that are going to be forced to compete with the new Euro-poor for more of that export market. Ok, it might not be that everyone will be happier under Stark’s growth model. But everyone that actually matters in Stark’s growth model will be much, much happier.
There are reports now that Mario Draghi and Jens Weidmann are barely speaking to each other. And as the piece below points out, Mario and Jens’s tiff isn’t just an squabble between two central bankers. It’s representative of a growing divide between those that view deflation and ongoing austerity policies as a either the source of Europe’s problems or the only possible solution:
As we can see, the hyperinflationary fear mongering coming out of the Bundesbank and Berlin is, if anything, inflating as deflation looms. And growing increasingly incoherent too. And as a result of these inflating hyperinflation fears the two paths facing the eurozone are either a lost generation or hurt feelings at the Bundesbank over people not sharing its weird hyperinflationary fear fetish. And thus far it’s very unclear which side will prevail although austerity via economic dysfunction is almost certainly going to win. Feel any fears inflating yet?
Also note when author says:
it’s important to recognize that this opposition to Bundesbank-style ideological madness only describes some of the US government. There’s no shortage of US policymakers that would love to indulge in some chronic hyperinflation fear mongering and those policymakers just might take complete control of the US Congress very soon. So while ideologically driven fears of hyperinflation may not actually be warranted, fears that fears of hyperinflation are about to inflate are very much justifiable right now. Destructive economic fear monger is a global growth industry:
Yes, that same mindless obsession on deficits and inflation that’s creating a European lost generation is about to seize complete control of Congress and that means both Europe and the US could find themselves trying to create prosperity via spending cuts. Simultaneously. And that means the the world’s developed economies are going to be simultaneously engaging in even more vigorous “internal devaluation” that they already are. It’s one of the underappreciated risks associated with GOP taking control of the US Senate: While the GOP may not be able to fully implement its austerity agenda the austerity is undoubtedly still going to increase if the GOP takes the Senate. And the US economy is one of the few growth drivers for the entire global economy right now. That means if the eurozone’s economic zombie apocalypse austerity mind virus infects the US economy and does enough serious damage to derail the existing recovery it’s going to be econo-WWZ because there are no other sources of growth. A self-destructing US will devastate global growth for a while.
It’s already scary enough when the Tea Party takes over branches of power in the US. But a US Tea Party takeover is even scarier when the German equivalent of the Tea Party has already indirectly seized control of most of Europe’s economic policy-making and sent the continent into a depression. The euro-Tea Party is already world-destroying enough and yet it’s looking like the US could hand over even more power to the US Tea Party which means US and German-zombie ideas are poised to go global once the GOP inevitablly hobbles the US economy and global growth sputters.
If this all sounds bad, fear not. While Mario Draghi and Jens Weidmann may no longer be on speaking terms that’s not really important. Once a zombie apocalypse strikes the world’s halls of power policy makers no longer really need to be able to talk. General grunts and groans about deficits and inflation are more than enough. It’s not all bad.
There was a recent piece by Ambrose Evans-Pritchard highlighting the fact that one of the biggest hurdles to the ECB’s successful execution of its quantitative easing (QE) will come to whether or not the ECB will be allowed to engage in any meaningful QE at all:
Note that the Reuters article lists which central bankers are in opposition to more aggressive quantitative easing: Germany, the Netherlands, Luxembourg, Estonia, Latvia, and possibly Slovakia, Slovenia and Austria, so it’s basically the same coalition of a rich creditor states (48% and 46% NIIP for Germany and the Netherlands!) and poor eurozone member states in favor of ongoing austerity that we’ve seen for years.
Continuing...
Yes, it certainly appeared that Mario Draghi seemed to have “hit the limits of European power politics” in his efforts to do something to drag the eurozone out of a deflationary death spiral. But that was two weeks ago. Today, somewhat stunningly, it’s all roses and sunshine:
So after Mario Draghi gives a speech that sounds remarkable close to his now famous “do whatever it takes” speech of July 2012 that’s been credited with preventing a collapse of the eurozone sovereign bond markets and hints at potential significant ECB policy shifts, we see Draghi’s rival banker, Bundesbank chief Jens Weidmann, give a speech that really says nothing about Draghi’s big “do whatever it takes II” proclamations. So what gives? Well, since it was a Weidmann speech, there were more calls for austerity/“stuctural reforms”, which is a reminder that there’s no reason the Weidmann faction on the ECB governing council isn’t planning on making ongoing austerity part of “whatever it takes” too:
“More than just favorable refinancing conditions will be needed to stimulate credit growth... [The euro area needs] structural reforms which bolster competitiveness and boost economies’ growth potential. A prosperous economy needs healthy banks, but the opposite is just as true: healthy banks need a prosperous economy.” That’s the kind of pro-austerity nonsense argle-bargle we should expect from Jens Weidmann. And if you compare his words to a speech Mario Draghi gave just last month, it’s clear that Weidmann’s endless austerity sentiments are still very much shared by Mr. “Do whatever it takes” too:
Yes, just last month Mario Draghi started off a panel discussion explicitly refuting Keynes. And then he discussed the need for more “structural reforms” that were needed to “achieve a sustained recovery. The same “structural reforms” that have sent the eurozone into a deflationary death spiral and continue to derail any nascent recoveries. Those need to be continued. “Without reform, there can be no recovery”. And that was just last month. So, really, what does Weidmann have to worry about? The situation is the same as ever: unfulfilled pledges to “do whatever it takes” and ongoing austerity. Maybe there will be QE but maybe not! The original 2012 “do whatever it takes” pledge was all about the ECB possibly buying sovereign bonds and that hasn’t happened yet, so why exactly would Weidmann worry about anything other than inadequate QE now?
And there’s the fact that Draghi’s call for a “coherent strategy” for implementing that “structural reform” sounds an awful lot like a call Draghi made back in July for another new to feature in the eurzone’s pro-growth strategy: Change the eurozone rules to make implementation of austerity policies out of the hands of national governments. Taking away the power to implement deep changes national socioeconomic policies out of the hands of national governments. That’s what Draghi was calling for just months ago:
First off, note that when Draghi talks about “Historical experience, for example of the IMF [International Monetary Fund], makes a convincing case that the discipline imposed by supranational bodies can make it easier to frame the debate on reforms at the national level...In particular, the debate can be framed not in terms of whether, but in terms of how reform needs to take place,” the IMF actually refuted its own austerity policy a while ago, so Mario Draghi is really on agreeing with the unreformed IMF opinions on the need for endless trickle-down “structural reforms”.
And as we can see overall, in the same speech in July where Mario Draghi calls for ‘establishing new rules that would require member governments to take “corrective action” to improve the competitiveness of their economies’ he also ‘repeated his concern about too-low inflation in the euro zone, and the ECB’s readiness to use “unconventional instruments within its mandate” should that problem persist.’ So whenever Draghi calls for “doing whatever it takes” to save the eurozone, it’s important to keep in mind that “whatever it takes” clearly involves maintaining or even increasing the insane fiscal austerity policies that have contributing to the deflationary death spiral in the first place.
So if you’re surprised by Jens Weidmann’s casual response to Draghi’s latest “do whatever it takes” speech, don’t be. Doing “whatever it takes” is a verbal Rorschach test that the austerians rigged for themselves a while ago.