The policy and the role of the European Central Bank during the crisis in the euro area

This Munich speech by Mario Draghi is interesting – here.

47 replies on “The policy and the role of the European Central Bank during the crisis in the euro area”

“Unemployment is a tragedy. It squanders the vitality of our workers. It prevents people from playing a full and meaningful part in society. It induces a sense of hopelessness, which drains the inspiration from our young. ”

Plámás unless it becomes part of the ECB’s remit.
The Fed targets employment and stable prices, the ECB just the latter.

No mention of JCT and his “strong vigilance” ie total waste of time when deflation was the issue.

The speech is wll-crafted and tailored to the audience. The crucial substantive paragraphs would appear to be;

“But preserving price stability today requires different actions than it did in the past. We have required new tools to ensure that our monetary policy decisions are able to reach firms and households.

This is because the crisis has severely fragmented the euro area’s financial system. It has disrupted the way our interest rate changes are passed on by banks to the wider economy. As a result, our low interest rates have simply not been getting through to people in some parts of the euro area.

This may sound like a technical matter. But the transmission of interest rates is fundamental. The euro area is a bank-based economy. Around three quarters of firms’ financing comes from banks. So if banks in some countries will not lend at reasonable interest rates, the consequences are dire.”

They are indeed! If Wolfgang Munchau is correct, Italian firms are paying ten per cent for bank loans. And Irish companies?

Just had a quick look, but I don’t think there is anything here about the role that the ECB has assumed in the fiscal matters of sovereign nation states.

The ECB has reserved the power to dictate to the Irish state when it should sell the NAMA bonds currently held by the CBoI. This power can directly and substantially impact the fiscal position of the democratically elected Government to the tune of billions of Euro. The latest agreement with the ECB only refers to the timetable of bond sales ensuring “Financial Stability”, which is definitely not the same thing as the stability of Irish fiscal position.

The Irish state will therefore be at the mercy of the ECB not just until the end of the bailout, but until the mid 2020s! We might think Draghi is a sound aul skin, but who’s next? President Weidmann or some other unknown, whom we have no control over electing.

Such a situation must be unprecedented in the relationships between Central Banks and Governments. Central Banks spent years striving for independence from Govt, now it seems states must strive for independence from the ECB.

– – – – – – – – – – –

On a slightly different topic, can anyone explain the mechanism under which the ECB is currently buying Italian Bonds, as reported in today’s papers?

It cannot be under the OMT as there is no conditionality in place. So is it under the SMT? If so, what is the difference between this and the OMT? The SMT is limited in some way? Does that mean that the ECB is happy to buy bonds now but it will stop at some point if the Italian Govt does not sign up to some conditions? Is this really credible?

Again, we seem to have a situation where the ECB can withdraw support for a state’s bond market if Olli Rehn (he with his head in the sand) doesn’t like the policies or lack of policies being implemented by the democratically elected Italian Govt.

The whole situation is an absolute joke and highlights the need for democratic oversight and accountability throughout the EZ.

Ironic really…vote for a couple of comedians and the ECB will help out by buying your bonds.
Maybe there is a lesson there!

On a slightly different topic, can anyone explain the mechanism under which the ECB is currently buying Italian Bonds, as reported in today’s papers?

It’s pretty simple. A guy in the Italian Treasury needs to sell a bond. He calls a guy in the ECB, who knows a guy in a bank somewhere. The guy in the ECB agrees to buy an IGB from the guy in the bank at say, 4.75% — provided the guy has the bond. So the guy in the bank goes to the guy in the IT and tries to buy an IGB at, say 4.6%, so he can sell it on at a profit. So the guy buys the bond, gives the money to the Treasury guy, then goes to Draghi — I mean the guy in the ECB, and sells the bond for a profit and gets the money back.

So that’s pretty straightforward.

Of course, there are a lot of guys and a lot of banks and a lot of bonds and treasury departments, but overall the system works pretty smoothly unless you start asking questions like, “Where does the guy in the ECB get his money from?”, or “Why are we doing all this in the first place?”, or some other pussy-willow question for guys that just don’t _get_ it.

I mean, the head of the ECB is advocating “Catholic Social Doctrine” as a response to the EZ crisis. Yeah, he talks about “price stability”, but what he really means it that confessing your QE sins will be enough to absolve you for eternity. Not like he’s being radical here; the other guys _talk_ about work ethic and responsibility, but you know they always believed in pre-destination anyway.

The bottom line is that our political and banking classes have a plan. That plan is to remake Europe in the image of Latin America. It is bold plan; it is daring; and it may just succeed. Whether this is the plan everyone first signed up for or not is no longer important. What is important, is that this guy in this bank is OK, and that his bonus is OK, and that he’s not like, _persecuted_ just for making money, from guys, or with guys, in ways they like, worked in, or whatever.

Speech seems consistent with:

“You do what we economic experts say you should first, that will get you funding. If what we told you to do turns out not to have worked, then we will “do more” later. But for now, just stop faffing about, and follow the instructions.”

He doesn’t address the question of what OMT actually is if the “conditionality” attached doesn’t have the economic effect it is assumed it will.

Does “do more” or “go further” mean printing, but like Churchill’s Americans, only “once they have tried everything else?” (or been bombed by the Japanese).

If so, what form will Peal Harbour take?

I was glad to see Draghi agree on something I’ve been arguing for quite a while now.

Namely that controlling the money supply through adjusting central bank reserves can only work in one direction. While creating central bank reserves sparingly may restrict growth in the money supply, flooding the banks with ample central bank reserves doesn’t increase the money supply, even in theory.

Draghi confirms ”It is a fallacy to make a mechanical connection between the creation of central bank liquidity and a rise in the money supply…It does not automatically increase credit or money in the economy”.

Ignoring negligible amounts of cash, the ECB cannot create any money that’s in circulation. While ample liquidity can leave the banks in a better position to create money for the economy, the banks cannot force people to go into debt to them. Even if people do borrow from banks this creates even more debt (P + I) than it does money (P).

I was disappointed that there was no acknowledgment that each repayment of a loan reduces the money supply and this is by far the main reason why there’s less money in a contracting economy. Again a falling money supply in one country was blamed on ‘deposit flight’.

I hope one day economics will teach that the money supply is constantly being eroded through loan repayments and finally economics students might being to see that reducing our debts to banks doesn’t leave us in a better position. Even better, economics could teach that banks create the money they lend in tandem with even higher debt so eventually we could start discussing more ‘sensible’ ways to create money.

@ OMF/Bazza

“On a slightly different topic, can anyone explain the mechanism under which the ECB is currently buying Italian Bonds, as reported in today’s papers?”

They aren’t. Can you link to where it says they are? I would suggest that newspaper articles are referencing a future event rather than the present tense.

@ Bazza

Aha, i assume the newspaper articles reference the past tense! That would be under the SMP program, but it hasnt bought anything in over a year, and essentially stopped buying in late 2011. SMP was the pre-cursor to OMT, and was a lot looser in how it was being used, though it was also considered more limited and temporary in size and nature, ie essentially a crisis response to yield levels going too high but without a clear remit on what amount and on what basis it would buy. OMT is a lot more structured, though still flexible on how it is actually deployed. But just to be clear, lest the conspiracy theories of OMF infect you, the ECB is not “currently” buying Italian govt bonds.


This is the article:

On second reading it is very ambiguous:
“Italian bonds pared recent losses today as investors took stock of the country’s political stalemate, with concerns over possible fresh elections offset by the European Central Bank’s bond-buying backstop.”

That sounded like the present tense to me on first reading which is why I asked under which programme the “buying” was taking place.

An excellent speech by Draghi. He places a large moral question mark over current German policy and indirectly refers to Germany’s history of flouting any moral or civilized values.
More than anything else, this is another crisis of morality in Europe and not just in Germany as he points out.

If the EZ and indeed the EU manage to emerge intact from this long period of crazed individualism, then the continent will have Draghi to thank for it.

About turning corners..
Rte reporting retail sales down 1.7% in January and property prices declining by an annualized 3.3%.
It’s obviously a cul de sac.

@ Paul Ferguson

I also noted this. However, he also said the following; “Price stability ensures that the market mechanism works properly, which is the best way we know to create growth, jobs and prosperity for all.”

The comment with regard to “the best way we know” suggests that there might be better alternatives. Unfortunately, to an outside observer, the present international financial and banking system resembles most the dominant computer operating system i.e. it is not the best, prone to viruses – especially in its different language versions – and occasionally crashes. Unfortunately, it is also an illustration of the paradox that we must continue to use it because we are all already using it.

The best hope is to fix the most recent bugs which brings us back to the “market mechanism”. Therein lies the rub. Italian firms are paying high rates because there is a lack of market confidence. This cannot be restored through the banking system or by market operators; only by those directing the economy in general i.e. governments. The chicken and egg nature of the situation is obvious.

The Italian Parliament will, coincidentally, it seems convene on 15 March, the second day of the European Council scheduled for 14/15 March! Presumably, Monti will attend the latter and the issue of how to restore confidence in the Italian government’s capacity for action will be top of the agenda.

@ Bazza

by “bond buying backstop” they refer to OMT, though press always seems to forget that u need to agree to an ESM program to get even potential access to this program. So its there, but only in the background, and very much in ‘off’ mode for the moment.

Draghi is priming his German audience for the actioning of the OMT which is going to have to move from the talking and bluffing phase to a buying phase judging by what is happening in Italy.

The Germans, according to Draghi, are only exposed if the Euro breaks up. Well then, they have a lot to worry about. Draghi is trying to convince Germans, that OMT is very much in their favour, trying to curry favour with them, priming them, trying to head off panic. The message he delivered? OMT is, after all, only for the good of you Germans. Let’s see if they see it like that?

from the Pontiff of Democracy in Frankfurt to another …

Benedict XVI lays down his burden
28 February 2013 Süddeutsche Zeitung Munich

States, markets and citizens on collision course

28 February 2013 I Kathimerini Athens

The uncertain outcome of the Italian elections and the success of Beppe Grillo have again demonstrated the undercurrents agitating Europe’s crisis-stricken countries. Will the EU, or even more crucially the markets, now make a gesture to break the vicious circle of crisis and citizens’ defiance? […] The tension that is simmering below the surface between the democracies of Europe and the international financial markets is not likely to end anytime soon and no one can predict its outcome.

This makes sense from a financialist point of view.
It acknowledges that unemployment is terrible but then proceeds to do nothing about it – we get a lot of that these days. Politicos now admit things are awful but do them anyway – I think I preferred when they valued our opinion so much that they lied and covered things up.
The OMT does allow for issuing of long term bonds because govts can roll them over with the shorter term issuance from the ECB.
The reason the bond markets aren’t going ballistic is that the financialist coup has rendered democracy useless – the system works no matter who is in charge (they think)

@ grumpy

I just read your link to Voxeu. I wonder what the people of Ballyhea would make of it! It seems not all the borrowed money during the boom was spent on holidays in Spain or went down the plughole in Bulgarian developments or, as happened to a considerable number of people who sold assets, through being invested in Irish bank shares.

Or, as Draghi puts it,

“The crisis has dented people’s confidence in the capacity of markets to generate prosperity for all. It has strained Europe’s social model. Alongside the accumulation of staggering wealth by some, there is widespread economic hardship. Entire countries have been suffering from the consequences of misguided past actions – but also from market forces that are sometimes beyond their control.”

While there are now between 800,000 and one million euro millionaires in Germany, which may have prompted the the comment, there is a curious refusal in Ireland to accept that the “accumulation of staggering wealth” has not been by un-burnt foreign bondholders- often representing institutional investors such as pension funds – but by people closer to home.

No matter what Draghi says or does – he is constrained by a remit that is deeply flawed in comparison to other global central banks.

This is the kernel of the matter. Until and unless the ECB remit is expanded suboptimal policies will continue to ensue to the detriment of EZ economy, society, and well-being.

[Walter] Eucken’s ordoliberalism, which is the German variant of neoliberalism, claims that the state has the task to provide the political framework for economic freedom, in contrast to laissez-faire. This includes a legal and institutional framework, including maintenance of private property, enforcement of private contracts, liability, free entry, and monetary stabilization. In this, the state should refrain from directing or intervening in the economic processes of daily practices, as in a centrally planned economy (Molsberger, 2008).

The idea of ordoliberalism was introduced for the first time in 1937 in Ordnung der Wirtschaft, a periodical published by Walter Eucken, Franz Böhm and Hans Großmann-Doerth. From 1948 on it was further developed in the journal ORDO.

No comment.

Impressive. Draghi’s speech is a well-crafted and well-scripted congeries of largely pious platitudes. One can hardly disagree with his citations that “the economy is not an end in itself, but is in the service of all mankind” or that “all efforts to establish a liberal order are futile unless a certain monetary stability is guaranteed or his argument that “reforms that make economies work better also make them fairer”.

But the speech is based on a number of highly questionable presumptions:

– that economic growth is achievable if only the correct policies are adopted;

– that the ‘European Social Model’ can be maintained in secula seculorum if only the correct policies are adopted.

Not to mention the article of faith that “the euro is a means to foster peace between nations; and a means to further our collective prosperity.”

Many skeptics would argue that the euro has fostered enmity rather than amity between nations, such as Greeks banging on about the Fourth Reich and Merkel as a Mach 3 version of Adolf Hitler.

Indeed the speech deserves a detailed fisking but this is my birthday and the Glenlivet beckons.

Take this:

“So if banks in some countries will not lend at reasonable interest rates, the consequences are dire. Perfectly healthy companies would be forced to close. Credit for new investment would not be available. Not because business models are flawed or because investment projects are too risky, but because firms happen to be located in the wrong place.”

A reasonable interest rate? WTF? And Draghi conceives of perfectly healthy companies which, unfortunately, happen to be located in the wrong place. Like I’m healthy but I’ve opted to live in a leper colony so my life expectancy is just six months but give me a cheap credit all the same. The Catholic doctrine of transubstantion makes more sense than that.

I don’t get paid for commenting so that’s all for now folks.

Noch ein Bier, bitte …


Noch ein Bier, bitte …


re: Who made and who lost in the ‘boom’. A little anecdote, if I may.

The construction of the Thurles-Cork section of the Dublin-Cork railway line, by the Great Southern Railway shortly after the famine, paid small amounts of compensation to tenant farmers, for land disruption or retention. The compensation was paid in Great Southern shares.
The recipient of some shares was a tenant farmer near Limerick Junction.
The shares were minded very well and through various share swops eventually became shares in the Munster and Leinster bank, which finally amalgamated with others into AIB about 1966.
Finally the shares were worth well over 500,000 prior to the ‘crash’.
No need to guess what they are worth now.
[PS-None were ever destined in my direction].

The anecdote serves to illustrate that there has been massive multi-generational wealth losses as a result of the total bank collapse in Ireland. The economic effect of that should not be underestimated.

Some landowners, and some astute house ‘flippers’ that got out in time, made money in the ‘boom’ but imho they were in a minority. Bank share losses destroyed old ‘wealth’ and bank losses also destroyed future wealth through abrogating tax income to recapitalise them.

My impression is that the man has depth, breadth and a conscience to boot. He will do what he can within his mandate as many you have mentioned above.
We cannot expect more than that.

The Irish Gov’t should take note that the PIIGS are being joined by the FISH (some overlap H = Holland)and that together they can change Draghi’s mandate for the better from our perspective. Are we out there beating the diplomatic bushes and letting it be known to all and sundry what we need and are willing to stand up and be counted for. Or are we effin da dog as usual.

FT Editorial on Bankers Bonus Payments (compliments DOCM)

“It will take fiendish rhetorical skill to explain why the UK is kicking up a fight for its bankers’ right to be paid huge bonuses.”

Indeed it will, Sir. And so it should.
Funny how that outraged editorial failed to justify or mention why the payment of a bonus of more than one year’s salary is essential to the future of the UK.

Some good papers,videos etc from the Reuters Euro Zone Summit available on line.
“European labor ministers met in Brussels on Thursday to discuss steps needed to improve job training and employment and head off the threat that joblessness could destabilize the EU.
They agreed on a “youth guarantee scheme” focused on ensuring that young people under 25 receive either an offer of work, further education or work-related training at least four months after leaving education or becoming employed.
The scheme is part of a 6-billion-euro initiative to tackle youth unemployment in the worst-hit corners of Europe over the next decade, a plan that will be discussed in more detail at a meeting of EU leaders at a summit in Brussels on March 14-15.”

‘‘I have previously noted that “without ethics, there cannot be a genuine development”. We cannot have an economic model that allows excesses to go uncorrected, which relies exclusively on self-regulation of markets and in which individuals believe that “anything goes”. Ultimately, we must be guided by a higher moral standard and a profound belief in creating an economic order that serves every person’’

In other words, the financialisation of the economy, and the uncontrolled growth of private bank credit, has taken us all down a cul de sac. Time for a bit of sense.

@Joseph ryan

In the old days, partners and senior staff at “market risk” firms (which were small businesses with 50 – 500 employees by and large, used to have salaries comparable to that of the typing pool. The profits (in years when there were any) were available to split as bonuses – which could sometimes be many times their salary.

That meant redundancies in volatile businesses could be avoided.

In 1985 or so, bankers ‘running’ much bigger businesses bought them all out. This allowed the culture of large bonuses to be applied to the senior execs at the banks.

The salaries didn’t go down, but the numbers were manipulated so the CEO of the big bank holding company always earned more than the guys running the “risk” businesses.

Everyone who might be asked for, or has provided a view on, the value of the Promissory Note ‘deal’ should probably read this:

“Minister for Finance, Michael Noonan:

The Government bonds now held by the Central Bank following the liquidation of IBRC will be placed in the trading portfolio of the Central Bank, and these bonds will be sold as soon as possible, provided conditions of financial stability permit. The Central Bank of Ireland is responsible for financial stability considerations. I would expect the Central Bank to take full account of the health of the domestic and international banking system, the global economic situation and developments in markets when considering financial stability considerations in relation to the disposal of these Irish government bonds.”

I agree with mr grumpy above.

The more I read this article the less I like it. The morality is of a piece with M Thatcher’s return to Victorian values, cf her famous exegesis on The Good Samaritan (a hymn to private health care).

Just to take one bit.

As M Hennigan never fails to point out (have a nice day in your Ferrari) the underlying big trend for the last 30 years in the West has been the stagnation of working wages. A larger proportion of the cake has been going to Capital and a smaller to wages. This is not an accident but a product of weakening union power and outsourcing.

I don’t think this is inevitable process as the US is currently showing. But it is often presented as such in a wora-going-to-do-about it sort of way.

I also think that bloggers can underplay the nature of class conflict in favour of a top-down jostling at the elbows of the ‘powerful’ approach. Draghi’s use of the word ‘weaker’ is interest here, I wonder what he means by that? Shay Begorrah puts these things better.

Anyway, it seems to me that unions are being bashed and so where union protection in pulling back younger and more marginal workers get worse terms and conditions, but paradoxically are being forced into the kind of flexibility being praised. You can see that with the new entrants into the Irish public service, and yes you can argue that the Irish Unions are letting the devil take the hindmost.

But what seems to happen then is that ‘fairness’ is invoked, as in this speech, and used inevitably to try and weaken other workers’ pay and conditions. Which, let us remind ourselves, is to the detriment of the economy as a whole.

So, whilst being fully aware that I am falling into the trap of making top-down suggestions., in the interest of actually ending on something positive I would say that the best way on from here might be (a) A European minimum wage, (b) The youth employment initiative not to be a way of delivering cheap labour, (c) more, not less, work/job protection for all.

It,strikes,me that the PN parallels most of the international agreements negotiated back to the Treaty. People take sides immediately and stick rigidly to the position for generations. Eventually, when the benefits appear and the risks fail to materialise a consensus forms that the deal was a good idea. Finally, after about 50 years or in this case when the bonds mature, the Last hold outs, usually the Shinners, split on the issue.

It seems only joseph ryan understood the Draghi ethical manifesto – a rare exposition of ethics by a CB!

Who was he talking to – Catholics of Munich & Bavaria.
Reluctant debutante’s to ECBs OMT and other monetary measures – strikes against their principle of subsidiarity.

It’s also an intellectual attack against Weidermann/Bundesbank and Ifo.

I personally consider this (non) monetary but highly ethical exposition by Draghi must be serious reading for Council Members – next round- after debacle of Italian elections.

@ Grumpy

“Everyone who might be asked for, or has provided a view on, the value of the Promissory Note ‘deal’ should probably read this:”

that post has nothing that is in any “new” in it. This was fairly clearly spelt out on Feburary 10th. Anyone not knowing what the situation was clearly wasn’t paying very much attention.


“provided conditions of financial stability permit”

I think I was paying attention, and that is the old bit.

“The Central Bank of Ireland is responsible for financial stability considerations.”

This confirms explicitly what most observers should have understood – ie that the Irish government will have no say in when the bonds are sold. As such it is not really new.

This is the part that should be noted because it is an upgrade to the previous reference to “financial stability” – a term which can be interpreted in slightly, but significantly, different ways:

” I would expect the Central Bank to take full account of the health of the domestic and international banking system, the global economic situation and developments in markets when considering financial stability considerations in relation to the disposal of these Irish government bonds.”

This is a much fuller guide to when we might guess the argument to not sell the bonds and so keep the gains from the central bank holding them, has become unsustainable. Possibly as a result of the Minister asking the central bank and being told what it thinks it means by “financial stability” we know it comes down to:

1. the health of the domestic and international banking system

2. the global economic situation, and

3. developments in markets

You could argue that your own guess at what they will take into account would have been very similar, but that’s only because you are very clever. There is now less ambiguity about what will be referenced.

The BUBA wing might be expected to consider whether it thinks the bonds could be sold in excess of the minimum without threatening the banking system, the global economy, or pushing up Irish and other sovereign bond yields, at any given time.

Some people like to think the ‘minimum’ means ‘maximum’.

Minor poiint:

Blind Biddy reckons those bonds should be cashed at the local post office and then the cash distributed to the Citizenry from whom they were stolen in the first place ….

… the postal order can then be cashed at the ECB.

Fianna Fail, Fine Gael & Labour have sold out their own; this fact is uncontestable.

Noonan’s quote refers to the CBI being the arbiter of financial stability and presumably also the arbiter of what pace to liquidate this portfolio. Now presumably the ECB would have a view on the pace of sale and it could put pressure the CBI to sell at a faster clip. But we don’t know that and I submit that however much you, NWL and his best buddy Pearse post on this issue, we will not be told.

We do not know what the ECB settled view on this matter is. I surmise it is divided. We do not even know if there will be an ECB for the lifetime of this portfolio.

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