Friday, July 27, 2012

Has Germany Changed Its Mind?

German finance minister Wolfgang Schaüble has more or less endorsed ECB head Mario Draghi's statement yesterday that the ECB "will do what it takes" to save the euro and, added Draghi, "believe me, it will be enough." The markets are apparently interpreting this as a promise by the ECB to buy beleaguered sovereign debt. Pierre Moscovici, while taking care to emphasize the "independence" of the ECB, said yesterday that it appeared direct market intervention was on the table.

So have we turned a corner in the euro crisis? Has the ECB decided to start the printing presses running overtime, and have the Germans decided to stop warning about "moral hazard," "encouraging profligacy," etc.? The proof will be in the pudding. But would you want to speculate against the possibility that the ECB might in fact be ready to use the big bazooka and not just run at the mouth? (On the other hand ...)

If the change of course has in fact occurred, we can retrospectively attribute it to two things: the imminent disaster that Spain faced this week and the report that austerity hasn't worked out so well for the UK, which turned in a dismal 0.7% GDP shrinkage last quarter. And even Germany has begun to feel the bite of the global slowdown. So the Germans may have blinked. And the Dow is flirting with 13,000 again. Everybody's happy, what could possibly go wrong?


Jean Quatremer said...

C'est amusant: c'est exactement le papier que j'ai écrit dans Libé aujourd'hui...

Art Goldhammer said...

Ah, bon, je ne savais pas. Here is Jean Quatremer's piece:

Mitch Guthman said...

How much worse do things need to get before Draghi decides it’s time to act? Mario Draghi is still the most useless man in Europe.

bert said...

Mitch, he has a way to go before he reaches the heights of uselessness scaled by Jean-Claude Trichet. There's always been something charming about the two top guys in French central banking being called Mr Cheat and Mr Drown.

French readers of this blog may occasionally be on the lookout for fresh evidence that financial markets are volatile, superficial, hysterical and fundamentally unserious. This Draghi business provides plenty.

Of course, a substantial change of policy may shortly be announced. The same was the case last week. There was a time when markets would rally on a summit communique. Now it seems what's needed is a speech in English, outside the eurozone, to an audience of bankers.

Krugman, simplifying without overly distorting, talks about how one of two impossible things has to happen: euro breakup or massive debt mutualisation. There is no evidence of a change in official policy. The constraints obstructing that change remain. And without that change this whole whatever-it-takes episode will be remembered, if at all, with a what-were-they-thinking shake of the head.

Mitch Guthman said...

Voilà ! Via Paul Krugman we learn that Germany says “ nein” . Apparently the most useless man in Europe speaks only for himself. Once again, Draghi says nothing and does even less.

Mitch Guthman said...

@ Bert,

I think you’re right about Trichet and I stand corrected. In his time, Trichet was definitely the world record holder for uselessness but, of course, he’s retired now and Draghi seems to be making a strong push for the crown. Out of all the players in this little drama, he’s the only one who’s equipped to resolve the problem on his own (or at least the ECB, which he heads, is capable of saving Europe on its own). He is clearly the most useless man in Europe today.

I think you and Krugman are also right about what needs to happen to end this depression. Everybody seems to know that Krugman is right but I don’t see any indication that the leaders of the EU and especially the Germans are capable of changing course in time to avoid the reefs.


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