Martin McCauley writes from Frankfurt: Mario Draghi, the calmly spoken head of the European Central Bank (ECB), came out with all guns blazing this week. He assured everyone that he would do everything in his power to ‘preserve the euro’. ‘And believe me,’ he said, ‘it will be enough.’
It sounded like Croesus allaying the fears of nervous markets and investors. So the stage was set for dramatic announcements about how he was going to work his magic. Instead, all that was on show was a mouse. Every comment was expressed in the subjunctive mood. The ECB ‘may undertake outright open market operations’. It may engage in ‘non-standard monetary policy measures according to what is required to repair monetary policy omissions’. No, this was not translated from Italian. He made his speech in English. So what does it mean in plain English? Don’t expect action any time soon. In other words, wait and see what we come up with. Put another way, we are not sure how to resolve the euro crisis.
Draghi is a reputable banker – one of the few who is respected in Europe and further afield – but he is a poor politician. You don’t tell the markets that you are about to deliver the silver bullet to save the euro and then mumble about considering all options. Unsurprisingly, borrowing costs in Spain and Italy edged upwards and stock markets declined as a result. Fears are growing that Spain will have to ask for a bailout which could be as high as 500 billion euros. The ECB is waiting for the European Stability Mechanism to come into being. It will deal with sovereign debt and will have the authority to impose strict conditions on loans. It will also monitor implementation of obligations entered into. In other words, Brussels, and by extension Berlin, will tell borrowers how to run their economy. The problem is that the German Constitutional Court has still to rule on the 100 billion euro bailout. No judgment is expected before 12 September. Then it may want to consider the constitutionality of the European Stability Mechanism.
The German Bundesbank is opposed to the ECB expanding its remit to buy up weak states’ debt. The ECB has a 200 billion fund for bond buying but this is clearly totally inadequate at present. The German government may have to harden its attitude to bailouts given that German manufacturing is declining. In the Eurozone only Ireland’s manufacturing sector is growing.
The lassitude of EU leaders is amazing. Have they forgotten that wars often break out in August when everyone is on holiday? The First World War broke out in early August and the Second World War hours after 31 August. Germany is gridlocked at present. Angela Merkel faces a general election next year and will increasingly have to put German interests first. Daniel Kahneman, a Nobel Prize winner in Economics, has shown that economic decision making is a mixture of the rational and irrational. We are now in the irrational phase.