Thursday, 10 December 2015

Puffing the magic Draghi

Mario Draghi had a rough time last week.  The extension of QE he announced disappointed markets, who were apparently expecting him to exceed expectations.  (Sounds oxymoronic to me, but I'm just a political scientist, not clever like a bond trader.) The upshot was a sharp rise in the value of the euro, which is a problem for a Eurozone demand model heavily reliant on exports.

Maybe Mario will be cheered up after Politico published a puff piece about him today. I wasn't; the article veered from the uninformative to actively misleading, reporting inter alia:  
Draghi ... [took] bold steps that enabled him to save the euro. Now that the danger of a disintegration of the eurozone has abated, the ECB president is embarking on an even tougher political task: to convince Europe’s governments that they must do their part of the heavy lifting to take the continent out of the slump. ... 
He is prodding EU governments to boost spending to put the European recovery back on a path to growth. ... 
For the moment, Draghi is happy to let Coeuré [ECB board member] and Praet [ECB chief economist] push the message that Germany in particular needs to splash out more on public infrastructure, to address what one ECB executive board member called an “absurd situation” where spending is so subdued that the fiscal deficit of the eurozone is much lower than the 3 percent allowed by the Stability and Growth Pact.
This a reiteration the myth that Draghi is an active supporter of a demand-stimulus approach to resolving Europe's growth crisis. However, all of the arguments I made against this myth more than a year ago remain valid. Above all, Draghi's shown not the slightest inclination to use his ample sources of political leverage to push for increased spending stimulus.  Nor has he repudiated his key role (see pp.34-38) in pushing for an austerity-led reaction to the Eurozone bond crisis, continuing to imply that no other choice was possible. As he recently put it, "don’t blame the fire damage on the fire brigade."

Perhaps, though, Draghi is beating the drums for demand stimulus behind the scenes? He is, after all, somewhat constrained as the public face of the ECB leadership.  Consider this exchange from the latest ECB press conference
Question: Last year in Jackson Hole, you advocated for a policy mix with monetary policy reforms, investment and fiscal policy, and today you have emphasised the role of fiscal policy. Do you miss more fiscal stimulus in countries with margin, like Germany, for example, and do you consider that the neutral fiscal stance that the European Commission is advocating for the eurozone as a whole is adequate now, in a sort of liquidity trap?
Draghi: We had a brief exchange on this issue, and our conclusion now is that, first of all, the first answer should be given by the Commission. The second point is that we'll continue reflecting on this, and we will have a view on what is the degree of appropriateness of the fiscal stance; whether we have a view about the aggregate fiscal stance; what is the degree of compliance with existing rules; whether the flexibility which has been exercised before all the terrible happenings of this year – so before the recent terrorist attacks, but also before the refugees events – whether that flexibility would be justified. So there are lots of factors in play altogether. How do we assess the fiscal stance today given the presence of the previous flexibility, the refugees, the need for security of the euro area? It's a very complicated question, so we are going to reflect on that.
One might read this as a sign that political conflict at the top of the ECB is limiting what Draghi can do by way of advocating fiscal sanity.  However:

  • Draghi has more than once found ways to move beyond the consensus of the bank's leadership, and there's no evidence he's trying to do so on this issue.
  • There is likewise no evidence that he personally views austerity as a crucial component of the growth catastrophe.  Asked at a November Europarliament meeting about what was needed to promote growth, Draghi had literally not a single word to say about government spending (see p.11).

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