Mario Draghi reassured the markets at the 21 January press conference of the European Central Bank (ECB) by making it clear that the Governing Council is unanimous in its desire to reassess economic conditions at the upcoming March meetings and to reconsider its policy stance if necessary. He stressed that there is no limit to the action that the ECB can undertake to achieve its mandate. And he reiterated that whatever the actual policy decision in March, the ECB is already working to resolve any technical issues that might prevent it from using the full range of instruments at its disposal. The response in the markets was immediate. Bonds and equities rallied while the euro moved lower against the dollar – all good things from the ECB’s perspective. ECB watchers were cautiously optimistic. A few voices noted that the ECB had promised in October of last year only to under-deliver in December; this time actions should speak louder than words. So should results. Draghi has reiterated his July 2012 promise to do ‘whatever it takes’. What he did not say is that ‘it will be enough’. Instead, he insisted: ‘We don’t give up.’
Tag / Financial markets
More than Just debt
Europe’s Orphan: The Future of the Euro and the Politics of Debt. By Martin Sandbu. Princeton: Princeton University Press, 2015. 313 pp. $29.95. ISBN: 978-0-691-16830-2 (cloth).
The euro did not cause Europe’s economic crisis; policymakers did. By focusing too much attention on debt, by demanding that existing obligations be met in full (and creditors made whole), and by doing so against a backdrop of coordinated macroeconomic tightening, Europe’s policymakers ensured that the downturn in European macroeconomic performance would be deep, long, and destructive. These same policymakers only narrowly avoided disaster when they began to loosen monetary policy and to accept the need for some debt restructuring. Nevertheless, these efforts did not come soon enough, they were no comprehensive enough, and they were not applied consistently enough to prevent Europe from coming to the edge of disaster as elite macroeconomic ideology finally collided with the requirements for democratic legitimacy in Greece (and Germany) during the summer of 2015. This is the diagnosis Martin Sandbu offers to explain what went wrong.
Europe’s Banking Union: ‘Failing Forward’?
Between the euro crisis, the refugee crisis, tensions within the single market, and anti-European political extremism, the European Union appears on the surface to be failing. This isn’t quite true though. Every time Europe faces a setback, it tends to make progress in response. This progress is usually only partial (or incomplete), but it is enough to lay the foundations for more comprehensive solutions to emerge in the future. What looks like failure is actually ‘failing forward’, a dynamic that Dan Kelemen, Sophie Meunier and I examined in a recent article in Comparative Political Studies. The latest incarnation of this concept is the recent developments – or lack thereof – at the December 2015 European Council summit, which was supposed to shore up European financial markets by pushing ahead with the construction of common institutions to safeguard European banks.
The Power of Language
Ideas matter in politics and public policy. Sometimes, however, language matters more. To see this, you only need to think about the distinction between the idea you have in your head and the interpretation it gets when you try to explain it to someone else. Now get them to say it to someone else, and so on. The people who hear you first-hand can repeat what you have said almost verbatim and yet the meaning is distorted, if not immediately then quickly as it passes down the line. The simplest idea – simply expressed – is no match for the telephone game. Hence the goal in political communication is to choose language that has predictable reverberations. The power lies not so much in the words themselves as in the underlying pattern they create through repetition. The message is coded in memes.
Central Banking Divergence Means Market Volatility
There are three divergences in the art of central banking. The most obvious is between the monetary tightening expected in the United States and the loosening expected in Europe. A second divergence is between the prudential oversight of the banking system and the conduct of macro-economic demand stabilization – particularly quantitative easing. A third divergence is between the communication of forward looking policy intentions and the practice of monetary policy decision-making. Each of these divergences acts as a constraint on the conduct of monetary policy; the juxtaposition of all three increases the risk of significant market volatility.
Continuing European Economic Vulnerability
The European Commission’s autumn economic forecasts paint a bleak picture. The headline is cautiously optimistic. European growth is moderating but should improve in the forecast period thanks to an accommodating monetary policy, a neutral fiscal stance, and a gradual relaxation of ‘headwinds’ coming from other parts of the globe. The analysis itself is more troubling. European growth relies excessively on external markets; price inflation will recover as commodity prices stabilize at low levels; and monetary policy accommodation in Europe contrasts with a gradual tightening in the United States with uncertain implications for market volatility and global capital flows. The bottom line is that things may get better and yet then again they may not. Although the authors of the forecast would argue otherwise, this is not a message that offers much hope.
Market Infrastructures: The Ties that Bind
Roughly nine thousand members of the global finance community gathered in Singapore last week at a conference devoted to ‘market infrastructures’ – meaning the plumbing (communication, clearing, settlement, depository) that makes finance work. On one level it was a very geeky affair with its own confusing jargon. The name of the conference, SIBOS, refers to another acronym, SWIFT. There was a whole forum devoted to standards – which are precise definitions for how things should look and work. If you wanted to fill a room, all you had to do was shout ‘block chain’ or ‘distributed ledger’. But the buzz was not only about technology. You could pack the room talking about China’s strategy to internationalize the renminbi just as easily. Market infrastructure is about power as well as plumbing. More important, the power and the plumbing tend to work at cross purposes.
European Capital Markets: Efficient . . . but Resilient?
The goal of the capital markets union is to make European financial market integration more efficient. Firms will be able to gain access to international credit (and other forms of capital) directly from the market rather than having to rely on banks for intermediation; savers will be able to gain access to cross-border investment opportunities without facing high transaction costs.
Central Bankers Seeking Normal
There is an ongoing debate about when (not whether) the Federal Reserve in the United States and the Bank of England will raise interest rates. Opponents of such a move acknowledge that interest rates have to go up some time but argue that the ongoing weakness in Europe, the slowdown in emerging market economies, and the turmoil in China are all good reasons to wait as long as possible. Proponents of an early rise worry about the distortions caused by prolonged ultra-low interest rates. They also want to bring interest rates up again so that they will have something to cut should they run into trouble in the future.
This debate may seem like the usual macroeconomic conversation you would expect to hear among central bankers and yet it is not. There is an underlying political controversy around central banking that creates an incentive for central bankers to move more quickly in raising interest rates than economic conditions might warrant. This controversy takes place any time central bankers approach the frontier between ‘conventional’ and ‘unconventional’ monetary policy; it gets stronger and more intense once they crossover and start using unconventional monetary policy instruments; and it lasts until central bankers find a way to return to normal.
The ECB’s Diminishing Room for Manoeuvre
European Central Bank (ECB) President Mario Draghi did not disappoint. In his first post-summer press conference, he responded to the recent volatility on Chinese equities markets – and across emerging markets more generally – by promising to relax monetary policy as much as necessary to shore up Europe’s fragile recovery. He articulated the promise in the form of a three-fold commitment: to expand the share of individual bond issues that the ECB could purchase without giving the central bank unwarranted market power; to maintain the pace of monthly asset purchases; and to loosen monetary policy even further ‘by using all instruments available within its mandate’ particularly as this refers to ‘the horizon, the size, and the parameters’ of ‘the asset purchase programme’. Market participants were quick to respond. The euro weakened against the dollar; equity prices rose on European stock markets; and the yields on European sovereign debt instruments declined.
It is easy to interpret living up to expectations as a sign of the ECB’s continuing influence over the markets. ‘Never bet against Draghi,’ is a popular banter among analysts. The transcript of the press conference tells a different story. Time and again, Draghi explains how his quantitative easing program has underperformed due to the influence of exceptional factors. Periodic declines in commodity prices, prolonged weakness in emerging market economies, increasing volatility in asset prices, and adverse movements in exchange rates between major currencies all contribute to the explanation. Of course the ECB could try again and harder, but why should the next time be any different? This question is not simply a rhetorical flourish. The canned opening statement only makes sense if the first commitment to quantitative easing was a failure.
Erik Jones 