The Quintet Screwing up Europe #3

Part 3 of the PIIGSty analysis based on Matthew Feeney’s article of Reason.com continues with an insight into the European Central Bank (ECB) President, Mario Draghi.

3. Mario Draghi ECB President 

Draghi is a relatively fresh addition to the European saga. The colourful choice of former Bank of Italy ( Italian central bank) governor to succeed the shrewd Frenchman Jean-Claude Trichet has managed to stir things up, not least considering the ECB – a bank built on the inflation averse German bundesbank model – is now led by an Italian. Considering the current crisis in Italy with Mr. Monti’s technocratic government desperately trying to piece the country back together after decades of political instability, corruption and fiscal irresponsibility, Draghi is unfairly battling prejudice from day 1. After his recent London pledge in late July to do ‘whatever it takes’ to protect the euro, Draghi has since failed to accurately outline what ‘whatever it takes’ means (because this means very different things to each key player).

In early August, with Draghi alluding to expanding the scale of bond buying using undeniably direct language, the ECB appears set for a showdown with reluctant member states (and a good thing too!) There are signs that the cold German approach is facing a thaw and warming to the idea of the ECB strengthening its bond buying effort to cover the big 2 – Italy and Spain but this isn’t without its domestic detractors. To placate these, government rebels have demanded ECB operating procedures be changed to provide for a German veto (effectively neutering Draghi by politicising the independence of the ECB – so very unlikely to happen). In the meantime, accusations of ECB mutating into a state financier and a ‘bad bank’” are being thrown about.”

While most of the this is typical political chest pounding without substance or particular importance, the reality is that an ECB which unilaterally chooses to dish out bail-outs using mostly German funds could be (pretty fairly) accused of doing this at the expense of Germany’s own best interests. Hence, questions arise as to why Germans would pay in the first place. ECB ‘independence’ remains factually correct as far as any offspring is ‘independent’ of its watchful parent.

A fuzzy ECB is no help when signs of EU solidarity aren’t too convincing. PIIGSty has long said that a collective comprehensive plan to ‘save the eurozone’ is the real Holy Grail eluding European leaders. While Draghi and others continue to drag their feet while promising the sun, moon and stars (yet not a single cent), his words inevitably just adds to uncertainty and inertia as member states publicly argue and the markets bounce around unconvinced. Plans such as ‘fiscal’ or ‘banking’ union – despite German support  – remain completely undefined as the powers that be pray for growth. Without a plan, investors become convinced that messy defaults are just around the corner. Would you invest your savings in Italy or Spanish debt right now?

The Euro-jitters continue…

It hasn’t helped matters that the Finnish Foreign Minister has been speaking frankly to the British Daily Telegraph about the oncoming currency crisis and the necessity to prepare for just the possibility of a break-up. Mr. Tuomioja spoke awkwardly frankly against the changing of current bailout (ESM) rules and the writing of blank cheques for further bailouts and (damningly) voiced a  personal distrust for Mr. Draghi (among others). Although rebuffed later by other Finnish ministers, the consequences of prolonged inaction in Europe are becoming graver as whispers of a managed mechanism for ejecting weak links from the euro resonates across the EU-27.

The inscrutable Angela Merkel is the one certainly on which the European project precariously sits and, as a result, is feeling heat and wrath in equal measure. With her own Bundesbank sounding the alarm over Draghi’s new August announcement of a Italian-Spanish bond buying campaign, her task to thread a very delicate needle at home and abroad is a near impossible one. Eventually though, sanity must prevail and difficult decisions made regardless of the political cost which PIIGSty believes will be forthcoming from her government, when the dust truly settles – possibly this Autumn.

EU Debt Seniority

In the meantime, until a comprehensive plan is published, issues like the seniority of EU bailout debts remain contentious. Under current ESM (European Stability Mechanism – the main bailout fund) rules, seniority means the order of repayment of debt by borrowers in the case of default.  When you throw into the mix a Spanish bank (not sovereign/country) bailout of over €100bn, then the waters become murky.

Ultimately (which will surprise no one) it will take a greater crisis to really give Draghi sufficient cover to deliver a politically acceptable plan – something he has made clear himself. A more interventionist ECB is the last thing Germany will accept and so member states must request a bailout (of whatever form). Small wonder investors are cashing in their Italian and Spanish bonds and preparing for the worst. Draghi must remember – actions do speak louder than words, not least to the markets he needs to tame or a least calm. Like the EU politicians, Draghi should stop waffling about wanting to ‘save the euro’ and actually do it.

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