'Whatever it takes' may be more than Draghi can imagine
There are times when one has to address one’s fiercest critics directly – that is what ECB President Mario Draghi has done. In a beautifully crafted article addressed directly at the Germans which appeared in Die Zeit yesterday, he sets out his – or should that be the ECB’s – stall with respect to where he stands, where he believes it all went wrong and how he sees the vision for the future of the euro.
He acknowledges that the stateless central bank has had to reach beyond its own remit in order to, in its own way, create the space for the politicians to make the changes which he believes are necessary in order to drive the single currency project forward. In most respects, there is nothing new in what he says, but what he does is, for the benefit of his German readers, distill the many statements he has made and which we in the markets have all heard before, into 1,200 words.
At the centre of the appeal for understanding, he writes “A new architecture for the euro area is desirable to create sustained prosperity for all euro area countries, and especially for Germany. The root of Germany’s success is its deep integration into the European and world economies. To continue to prosper, Germany needs to remain an anchor of a strong currency, at the centre of a zone of monetary stability and in a dynamic and competitive euro area economy. Only a stronger economic and monetary union can provide this.”
That’s not much of a surprise.
However, I have a feeling that he, like most of his peers are missing the point. He correctly surmises that: “The consequences of misguided fiscal policies in a monetary union are too severe to remain self-policed” and that “Therefore, we cannot afford a situation where some regions run permanently large deficits vis-à-vis others.”
Ten out of ten for perception and for stating the obvious. It certainly makes sense to take advantage of the quiet markets to read the piece while reminding yourself to whom this is addressed.
He closes: “Those who want to go back to the past misunderstand the significance of the euro. Those who claim only a full federation can be sustainable set the bar too high. What we need is a gradual and structured effort to complete EMU. This would finally give the euro the stable foundations it deserves. It would fully achieve the ultimate goals for which the Union and the euro were founded: stability, prosperity and peace. We know this is what the people in Europe, and in Germany, aspire to.”
Well, Herr von Sixpack, you have been told.
Alas, Draghi misses the main point and one of which I believe I am among the very few to have highlighted, namely that the structural deficits which are at the core of the crisis are brought about by social programmes which are largely, in plain speak, unaffordable, irrespective of where in the economic cycle we might find ourselves.
As long as these are not tailored to a realistic assessment of potential output, they will remain a drift-anchor on the nation in question and predilection of taxpayers in the stronger economies to fund the weaker ones will remain questionable. The harmonisation of fiscal policies is not just about the balancing of income and expenditure to a set of percentages as in the Treaty of Maastricht, but a strict harmonisation of benefits. The internal transfer mechanism which underlies and cements the currency union will be the cause of unending discontent at grass-roots level until the benefit system is unified.
The question he [Draghi] fails to address is one which is spooking around all day and every day: How much does “whatever it takes” cost and who has to pay for it?
Taking into account the sort of time-frames in which simple increases in retirement age need in order to be implemented in a single country, try to imagine how long it will take to achieve such a result across the 17-member states. However, that time is not available and there is no conceivable reason why the Germans should want to work until they are 67 in order to fund anyone else to retire at 63 or at 60.
Draghi, in his article, makes clear ideological sense although I suspect that the problems of bringing the Germans on board are not ideological at all. They are as loyally pro-European as the rest; it is the practical aspects over which the single currency project is currently tripping. Most arguments which occur are between idealists (or ideologists) and pragmatists.
Both sides know that the other one, as diametrically opposed as it is, is also right and yet, never the twain shall meet. One cannot fault Professor Draghi for stating his position as he does. However, the question he fails to address is one which is spooking around all day and every day: How much does “whatever it takes” cost and who has to pay for it?
Meanwhile, I received the opening comment from one of the large dealers which reads: “Welcome on board, don’t recall seeing so many unchanged prices/spreads on day-to-day basis.” I can’t disagree and shall therefore happily go back to sleep.