Summary: Although entertaining as gallows humor, last week’s statement by ECB President Mario Draghi illustrates important but seldom discussed aspects of the euro-crisis. Here we read and annotate the text.
It’s an oddity of our time that people tend to rely on secondary sources — journalists and pundits — to learn what the world’s leaders say. Twenty years ago major papers, such as the New York Times, ran their speeches in full. Thanks to the Internet we can do so as well. Here we feature a major speech, with some information and analysis accompanying it to provide context.
Contents
- An annotated speech by the President of the ECB
- They know what they want. They don’t see why their actions almost guarantee failure.
- They are relying on hope
- Other posts reporting Europe’s slow march to the cliff
(1) An annotated speech by the President of the ECB
In our world few things are as they seem to be. There are hidden complexities. There are hidden truths. There are lies and misrepresentations. Here we examine this important speech by a high European official, a speech which has electrified not just Europe, but investors around the world (mostly for wrong reasons). Draghi speaks candidly. But to correctly interpret his words we must understand his orientation — described in the annotations.
Speech by Mario Draghi, President of the European Central Bank at the Global Investment Conference in London 26 July 2012
… I think the best thing I could do is to give you a candid assessment of how we view the euro situation from Frankfurt. And the first thing that came to mind was something that people said many years ago and then stopped saying it: The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does.
He refers to the widespread forecasts at its beginning by economists that the euro-system could not and would not work. For details see Can the European Monetary Union survive the next recession?, 11 July 2008. Next he explains the results to date of the euro experiment:
So the euro was a bumblebee that flew very well for several years. And now – and I think people ask “how come?” – probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis.
Paul Krugman gives a more accurate explanation:
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{W}e know pretty well why the bumblebee was able to fly: massive capital flows from the core to the periphery, which led to an inflationary boom in said periphery, and which therefore also allowed the German economy — which was in the doldrums in the late 1990s — to experience a big gain in competitiveness and hence a surge in its trade surplus without needing to go through painful deflation. This meant, in turn, modest inflation in the eurozone as a whole — slightly above 2% over 1999-2007.
Then Draghi then puts the EMU in its proper context, as early form of a great State-to-come:
The bumblebee would have to graduate to a real bee. And that’s what it’s doing.
They built the EMU to act as a bridge moving Europe from individual nations to one State. It was a gamble against time, hoping to achieve unification before its flaws emerged. And its working in terms of the metrics which Draghi considers important.
The first message I would like to send, is that the euro area is much, much stronger than people acknowledge today. Not only if you look over the last 10 years but also if you look at it now, you see that as far as inflation, employment, productivity, the euro area has done either like or better than US or Japan. Then the comparison becomes even more dramatic when we come to deficit and debt. The euro area has much lower deficit, much lower debt than these two countries. And also not less important, it has a balanced current account, no deficits, but it also has a degree of social cohesion that you wouldn’t find either in the other two countries. That is a very important ingredient for undertaking all the structural reforms that will actually graduate the bumblebee into a real bee.
There are two important things to know about this. First, these things are all true about Europe. American conservatives don’t just deny them, they lie about them, as their success requires that Americans remain ignorant about the successful aspects of Europe: stability, growth, lower income inequality, greater social mobility, and universal health care. These things are even more pronounced in the Nordic nations than the EU itself. Second, many europeans have come to doubt that the European Monetary Union helps them. As in the new Emnid poll that showed 51% of Germans believed they would be better outside the eurozone, while 29% said it would be worse off (source: AFP).
The second point, the second message I would like to send today, is that progress has been extraordinary in the last six months. If you compare today the euro area member states with 6 months ago, you will see that the world is entirely different today, and for the better. And this progress has taken different shapes.
At national level, because of course, while I was saying, while I was glorifying the merits of the euro, you were thinking “but that’s an average!”, and “in fact countries diverge so much within the euro area, that averages are not representative any longer, when the variance is so big”. But I would say that over the last 6 months, this average, well the variances tend to decrease and countries tend to converge much more than they have done in many years – both at national level, in countries like Portugal, Ireland and countries that are not in the programme, like Spain and Italy.
Yes, convergence in terms of the things a conservative values: deficits, safety of property, protection of creditors, low taxes on the rich. Little or no convergence for many of Europe’s peoples. Do you see “variances decrease” in this graph of unemployment?
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Now we see what Draghi values, and how he measures social progress:
The progress in undertaking deficit control, structural reforms has been remarkable. And they will have to continue to do so. But the pace has been set and all the signals that we get is that they don’t relent, stop reforming themselves. It’s a complex process because for many years, very little was done – I will come to this in a moment. But a lot of progress has been done at supranational level. That’s why I always say that the last summit was a real success. The last summit was a real success because for the first time in many years, all the leaders of the 27 countries of Europe, including UK etc., said that the only way out of this present crisis is to have more Europe, not less Europe.
No mention by Draghi of the social cost of this progress: poverty, lives ruined for the next generation:
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Then he returns our attention to the greater project: unification.
A Europe that is founded on four building blocks: a fiscal union, a financial union, an economic union and a political union. These blocks, in two words – we can continue discussing this later – mean that much more of what is national sovereignty is going to be exercised at supranational level, that common fiscal rules will bind government actions on the fiscal side.
Then in the banking union or financial markets union, we will have one supervisor for the whole euro area. And to show that there is full determination to move ahead and these are not just empty words, the European Commission will present a proposal for the supervisor in early September. So in a month. And I think I can say that works are quite advanced in this direction.
… The second message is that there is more progress than it has been acknowledged.
But the third point I want to make is in a sense more political. When people talk about the fragility of the euro and the increasing fragility of the euro, and perhaps the crisis of the euro, very often non-euro area member states or leaders, underestimate the amount of political capital that is being invested in the euro. And so we view this, and I do not think we are unbiased observers, we think the euro is irreversible. And it’s not an empty word now, because I preceded saying exactly what actions have been made, are being made to make it irreversible.
But there is another message I want to tell you. Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.
Europe’s leaders are committed. But they have not asked Europe’s peoples for their consent. They tried that with the European Constitution signed in October 2004. Two of the first four national referendums approved it (Spain, Luxemburg); voters in France and Spain Neatherlands rejected it — and it was abandoned. See Wikipedia for details. Europe’s leaders decided to rely on their power and reputation to achieve unification, passing the Treaty of Lisbon as the next step. Only Ireland’s people had the opportunity to vote; they rejected it in 2008 — and were pressured to approve it in 2009. See Wikipedia for details.
The great recession has exposed and exacerbated the flaws of the eurozone. Europe’s leaders use this to advance unification. Will their people follow?
(2) They know what they want. They don’t see why their actions almost guarantee failure.
In this speech Draghi explains the goals of Europe’s leaders (oversimplifying, they’re not one entity). They seek to protect their banks (and bankers). They seek to preserve the European Monetary Union, and continue progress to unification. Plus the third goal, usually in the shadows but stated clearly here: this crisis provides opportunity to break (“reform”) Europe’s social welfare systems. “Expansionary austerity” is an oxymoron in economic terms (as Krugman and so many other economists predicted), but accurately despite the politics. Austerity has expanded the power of Europe’s central State.
But the blindness of Europe’s leaders to the social costs — the human costs not even mentioned by Draghi, because they don’t show on a financial statement or in an economist’s model — might wreck the project. How long will the people of the periphery bear the deepening recession (depression for some, like Spain and Greece)? That remarkable social cohesion Drahgi mentions (which has so astonished many of us) might not last much longer.
(3) They are relying on hope
So far the 1% (investors, and the managers of their wealth) have greeted every action by Europe’s elites with applause, and ignored the growing cracks in the structure. Rising unemployment, rising interest rates, lower ratings on Europe’s sovereign bonds, ever-stronger warnings from global institutions (eg, the IMF). Both Europe’s elites and the world’s 1% have faith in the course steered by Europe’s elites.
At some point this becomes blind faith. Every new conference concludes with Europe’s leaders making speeches that sound like in Chapter 13 of Peter and Wendy (James Matthew Barrie, 1911):
Tinker Bell’s wings would scarcely carry her now, but in reply she alighted on Peter’s shoulder and gave his chin a loving bite. She whispered in his ear ‘You silly ass’; and then, tottering to her chamber, lay down on the bed.
His head almost filled the fourth wall of her little room as he knelt near her in distress. Every moment her light was growing fainter; and he knew that if it went out she would be no more. She liked his tears so much that she put out her beautiful finger and let them run over it. Her voice was so low that at first he could not make out what she said. Then he made it out. She was saying that she thought she could get well again if children believed in fairies.
Peter flung out his arms. There were no children there, and it was night-time; but he addressed all who might be dreaming of the Neverland, and who were therefore nearer to him than you think: boys and girls in their nighties, and naked papooses in their baskets hung from trees. ‘Do you believe?’ he cried.
Tink sat up in bed almost briskly to listen to her fate. She fancied she heard answers in the affirmative, and then again she wasn’t sure. ‘What do you think?’ she asked Peter.
‘If you believe,’ he shouted to them, ‘clap your hands; don’t let Tink die.’
Many clapped. Some didn’t. A few little beasts hissed. The clapping stopped suddenly; as if countless mothers had rushed to their nurseries to see what on earth was happening; but already Tink was saved. First her voice grew strong; then she popped out of bed; then she was flashing through the room more merry and impudent than ever. She never thought of thanking those who believed, but she would have liked to get at the ones who had hissed.
(3) Other posts reporting Europe’s slow march to the cliff
See the new FM Reference Page Europe – on the road to division or unification.
Some posts describing Europe’s drift towards a brink:
- The periphery of Europe – a flashpoint to the global economy, 8 February 2010
- About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
- Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
- Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
- Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
- Where to from here, Europe? Some experts share their views., 8 November 2011
- Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011
- Looking ahead to see the new shape of Europe, 22 November 2011
- Europe passes the last exit. A great crisis lies ahead., 21 February 2012
- The Fate of Europe has become visible. Only how and when the break comes remains uncertain., 6 June 2012
- Europe has a political crisis. The economics are just symptoms., 11 July 2012
- The hidden goal of Europe’s leaders. See it and then their actions make sense., 27 July 2012
I remember reading awhile back that some major bank had predicted that in time a country’s bond rating would be mostly dependent upon the level of its “social cohesion”, meaning the level of the docility of that country’s population.
“But there is another message I want to tell you. Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. There are some short-term challenges…the financial fragmentation that has taken place in the euro area…blah, blah….”
So let me morbidly draw a comparison between “Herr” Draghi’s words and the Total War speech given in early 1943 by Goebbles: “well, we tried to cover it up but now that everyone knows, sure,we did in fact loose 600K men etc but we have since erected a mighty bulwark in the East…” Draghi might have used the word Bazooka.
Sure it’s an exaggeration, but why not inject a bit of levity into the discussion. You can catch the speech on YouTube. Look at the enthusiastic faces of the collective Nazi elite which I find fascinating. In another two years many of them would be dead.
On a more serious note, what else was Draghi supposed to say? These guys are all in, and there’s no place for them to go. The only thing Draghi didn’t do was to condemn the “English” press. And no, they don’t care how many Greek mothers have to give up children to the Orthodox Church because they can’t be fed. Beyond what the periphery peoples do, what will be the reaction of the German people when they realize that they’ve been lied to and that Germany may become the principal bag holder of the euro project if it goes bad?
Sorry for the long comment.
Germany becoming the principal bag holder depends upon the elite having already won. Why not default instead? Why should Germany continue to support the privileged class when all the rest of Europe abandons them?
Please explain this a bit more. I do not understand your question. What elites? Won where, and whta? Who should default? What is the “privliedged class” Germany supports? Who is abandoning this “privledged class”?
Okay, for Germany to be a ‘bag holder’ they would have to honor the commitments made via the Euro rescue. In addition, it would imply that all the rest of the Euro countries left (thus Germany holding the bag). If Germany were to honor this, it would mean that the interest-collectors had somehow convinced the German people to pay them (in spite of the implied fact that all the rest of the countries had left). The privileged class refers to the interest collectors who do not have to work to earn the money.
So…If Germany were to become the ‘bag holder’, 1) most of the rest of the EZ countries must have left. 2) Germany would still honor all the commitments made 3) Germany would have had to decide not to default on the debt garnered by its commitments to the EZ bailout packages (even though, at this point, much of Europe’s economy would be in shambles due to the Euro no longer being accepted as currency in most places).
That’s a radical misunderstanding of how the ECB and other euro-institutions operate. They are shared liabilities. Why would Germany pay, for example, French or Italian institutions for France’s or Italy’s share of euro-institutional liabilities if France or Italy both LEFT the EZ and defaulted?
I’m certainly no expert in this, but my understanding is that contributions have been voted by the Bundestag and that bonds have been issued to provide the bailouts that are guaranteed by the ESFS. The guarantees are in proportion to the countries weightings in the ECB. 27% Germany, 20% France, 17% Italy and 11%Spain.
Then there’s the ECB’s LTRO operations of lending a half trillion euros for 3 years at 1% interest. 325B euros went to Greek, Italian, Spanish, and Irish Banks. The collateral for these loans to these banks includes government debt of de facto insolvent countries and who knows what else. Ultimately the ECB’s balance sheet is backed up by asset contributions to it from the central banks of its member nations so that they become liabilities of those nations’ taxpayers.
A good article written by Simon Johnson on the potential risk, especially to Germany of all this imploding is here “The End Of The Euro: A Survivor’s Guide“, The Baseline Scenario, 28 May 2012.
My concern: What will be the political consequences of all this in Germany if Greece and other states leave and/or default? The high level of German prosperity over the last decade was very much based on credit extended to other Europeans to buy German exports, a fact which the average German certainly does not understand. That prosperity is already slipping away right now. And with a Euro collapse on top of that, which will have Germany very much as a target, the political consequences can be very grave indeed.
As to Germany defaulting on its EFSF and ECB obligations, really if it comes to that who cares? The German economy along with th rest of it will be in ruin. Merkel, I imagine, will tell the Germans to blame the Greeks. A truly wonderful end to the European Project.
This violates FM’s dislike of long posts, but I thought it necessary in this case.
As usual for these disturbing geopolitical situations, the media tends to feed fears so that unlikely worse-case scenarios become the base case. A EZ break-up could be done well or badly, and have bad or horrific consequences. It’s largely an execution risk.
Some important things to remember:
(1) It’s a financial crisis. Unlike natural disaster or war, the day afterwards nothing material has changed. Europe’s people are still there. Europe’s infrastructure remains intact. Only the entries on ledgers will have changed, which is a zero-sum game to europe’s life as a wholey.
(2) It’s winding the clock in some respects back to 1999. Not the dark ages. No some fictional hellzone. Life was OK in 1999.
(3) If the EZ breaks up into smaller units, some will default in whole. Some will do soft (parital) defaults: extending maturity of debts, reducing rates, redemoninating them in a new currency (with a lower value).
(4) Most likely each nation (or zone) is on its own. It will not be joint liability. That is, Germany (or the Germanic zone) probably will not pay Greece’s share of the pie — and will certainly not pay Greek institutions holding EZ liabilities. US institutionals will suffer part or whole loses on parts owed by defaulting nations.
(5) We see these events as “end times” because most of the reporting is done by financial types for whom banks and money are the world. Much as we saw homes as the uber-asset because the RE industry provided most research on home valuation and transactions.
(6) And of course the doomsters get absurd levels of attention, despite being almost always wrong. Two years ago there were widespread predictions of massive social unrest in Greece. Those who read Zero Hedge might believe Athens lies in ruins from all the riots, and is ruled by Nazi-like Stanlinist parties. In fact they’ve maintained social cohesion quite well.
Modern history is a tale littered with bank defaults, government defaults, and depressions. Late 19th century is described as a period of incredible economic growth, yet they had depressions every few years. No food stanps, unemployment insurnace, or Medicaid.
The next stages of the euro-crisis could be harsh or wonderful. It’s all about execution by leaders, social cohesion, and luck.
Unna, you may not be an expert but you’ve certainly done your homework! Thanks for the research.
Another great post, FM.
I agree with Unna about Draghi being “all in.”. What else can he say? But I note that the means the European political union is unintentionally becoming more evil. Great good rarely comes from small-minded tyranny.
The investors in the US stock market are also “all in.” All of the more cautious investors are on the sidelines. The only people who are still in are the ones who very firmly believe that the US will pull through this current slowdown and China will not weaken and Europe will get stronger and Bernanke will give them an extra big surprise if they wish long enough on a star.
The big question is what will happen if/when reality asserts itself so strongly that the dream becomes impossible for even the strongest believer.
“when reality asserts itself so strongly that the dream becomes impossible for even the strongest believer.”
That’s the question! So far they people of the perifery have remained loyal to the euro-project despite great economic distress, with no signs of imrovement visible. I am surprised and astonished at this. But there must be limits. The current plan seems likely to explore those limits. Reliable forecasting is, as I have long said about this, difficult or impossible.
The crowds in the street need a political vehicle. Thus far they keep getting bounced from centre right to centre left parties whose words are a bit different but whose policies are effectively the same in regards to the euro, austerity, and Draghi’s mantra of all debts must be paid. I’ve been a fan of the euro, but at this point I’m willing to throw in the towel to FM that given the EMU structure and the character of current European elites, the project was doomed from the start.
Which right wing or left wing party in which country will be the first one to break free? This may not be a happy story but is inherent in the program of austerity and social repression itself. Also, no matter what they sign, each European country will always be free to leave the euro any time in the future albeit with some inconvenience. All treaties are in the end scrapes of paper and will be regarded as such when they no longer serve a country’s interest.
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Perhaps the text should read <>. Thank you so much for your guidance in putting the EZ crisis in context, particularly the loss-of-sovereignty issues.
”They tried that with the European Constitution signed in October 2004. Two of the first four national referendums approved it (Spain, Luxemburg); voters in France and Spain rejected it — and it was abandoned. See Wikipedia for details.”
Perhaps the text should read “ ….voters in France and the Netherlands rejected it – and it was abandoned….”. Thank you so much for your guidance in putting the EZ crisis in context, particularly the loss-of-sovereignty issues.
Fixed! Thank you for catching this and posting this comment about it!
It’s always dangerous to go to these kinds of sources, but in chapter three of The Prince Machiavelli cautions: “…men change their rulers willingly, hoping to better themselves,
and this hope induces them to take up arms against him who rules:
wherein they are deceived, because they afterwards find by experience
they have gone from bad to worse.” And further: “… that neither their laws nor their taxes are
altered…” This if the Prince desires a relatively peaceful situation.
It seems that the elites have violated both these recommendations. The Europeans changed rulers in the hope of bettering themselves but now have discovered that they have gone from bad to worse with the EMU and with euro friendly governments changing their laws and customs to the disadvantage of the general population.
How did the Europeans “change rulers”? At least until recently, when the periphery lost some of its sovereignty to the core of Europe.
Yes that, but more the change in their currency regime of the euro for which the closest thing in The Prince would be “rulers”. The sense here is that the Europeans changed those who rule their currency in the hope to “better themselves” only to “experience that they have gone from bad to worse”. Also, the fact that the new “rulers” (ECU et al) are altering/trying to alter the laws governing their social programs and increasing their taxes to the detriment of the people as per your prior posts.
If I’ve grasped correctly the essence of Machiavelli’s teaching in this area, it is that in taking over the government (currency regime) of a formerly self governing state with a long history of certain laws, both social and labour, and with a certain taxation policy, it’s bad statecraft for the new prince to change any of these to the negative – especially after having been invited in as a new ruler by the people. The Prince is a work both about gaining power and keeping it.
Upon having gained power over the currency through the ECU, the financial elites enriched themselves personally by means of massive financial speculations thereby bankrupting their corporate institutions and their countries. (Even Germany was downgraded to negative outlook, I believe.) And now they wish to (use the crisis to) change the laws and raise the taxes of the people to save themselves and to ensure their future wealth at the peoples’ expense. I sense that Machiavelli would hold such venal rulers in contempt. Especially if they eventually lose power because of this.
Concerning Machiavelli, just to add one more thing. These EMU countries are not militarily conquered territories and it may be foolish of the EMU elites to treat them as such. They’re not trying to reduce these populations to quasi poverty by the sword (cops notwithstanding) but by guile. Their methods are really not those of a Prince, even a Machiavellian one, but of a bunch of petty swindlers writ large. The Machiavellian fox and wolf. These guys (and gals) are at best all fox. And they’ll be scattered if even one political wolf appears on the European scene.
I hope I’m not boring people with this. I confess I do enjoy drawing historical analogies because sometimes they’re instructive
Historical analogies are one of the few tools we have to understand the present.
“They {EMU elites} are not trying to reduce these populations to quasi poverty by the sword (cops notwithstanding) but by guile”
We can only guess at intentions, but I doubt that is correct. My guess is that they’re using the economic hardship as a period to “reform” Europe’s social welfare systems. That involves hard times for the periphery. But that was to some extent unavoidable as a handover from the imbalances of the EMU-boom period.
It’s different only in degree from what US elites — represented by both the Democratic and Republican parties — intend for America. For details see “Obama’s Second Term Agenda: Cutting Social Security, Medicare, and/or Medicaid“, Matt Stoller (political analyst with Russell Brand, fellow at the Roosevelt Institute), Naked Capitalism, 29 July 2012.
Yes, I did overstate the “reduce to poverty” case just a bit. I read the Matt Stoller article the other day, Good read; but I’ll save my reaction for some more opportune moment. Thanks for the feed back.
What kept the bumblebee flying was the real estate bubble, The EU should be a warning of the massively destructive power of these bubbles. Prior to the Lehman crash most of these countries (Greece aside) all had reasonable national deficits, but what was happening was that banks were feeding credit into rising real estate prices. It was this bubble that kept the treasuries filled and the welfare state running –it fueled imports and kept manufacturing in Germany going.
But, however high real estate values rise due to cheap credit, ultimately the only real basis for real estate prices is wages, and some point it comes crashing down. The losses in the banks get nationalized, the states and the people are enslaved to debt forever. Tragedy follows.
See Krugman’s explanation in this post.
Not every nation in the periphery had a real estate bubble, but all experienced severe distortions from mis-pricing of money due a monetary policy suited for Germany — and the resulting capital flows.
I wish I knew more of the history of Spain under the Fascists during the Great Depression. Something tells me it would be instructive reading for the current context.
Spain’s civil war began in 1937, followed by Franco’s fascist regime 1939 to 1975.
Agreed, that would be interesting. Do any of our readers know about this period, or know of relevant sources?
“Political Sophistication and Sovereign Debt Resettlement“, Henry Farrell (Assoc Prof Political Science, George Washington U), The Monkey Cage, 30 July 2012
K. Amber Curtis, Joe Jupille and David Leblang have a paper on Iceland’s “Icesave” referendums, “the only occasions in history on which ‘the people’ were asked to vote directly on sovereign debt resettlement terms.” On the basis of a survey conducted immediately after the second referendum, they find that voting was in part driven by individual self-interest (although their findings are in places equivocal). Perhaps their most interesting tentative finding is that there is no evidence that levels of political sophistication or political knowledge affect voters’ ability to vote their interests.
This has implications, if it bears out more generally, for broader debates about political knowledge and the circumstances under which voters can and cannot be expected to vote intelligently to further their particular interests.