Summary: Monday’s post explained why last week’s statement by ECB President Mario Draghi was not the game-changer Wall Street assumed. Today the ECB met and did little but give more comforting words. Here’s the scoop.
Cutting through the fog, here is my guess about Draghi’s notes for the press conference:
- Lead off with: no change in rates or policies.
- To periphery: pay your debts, slackers!
- To euro-governments: continue flogging austerity & reform until morale improves!
- To everyone, most especially myself: The euro is irreversible.
- About the future: in coming weeks we’ll think about doing stuff.
- Don’t worry: if conditions go into the toilet again, we’ll do stuff.
- What about my speech last week? The euro is irreversible!
- What will stop the long slide of Europe into recession or worse? Austerity & reform!
- Why will those things work in the future since they have not so far? The euro is irreversible!
Excerpt from Draghi’s statement
… we decided to keep the key ECB interest rates unchanged …
The Governing Council extensively discussed the policy options to address the severe malfunctioning in the price formation process in the bond markets of euro area countries. Exceptionally high risk premia are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy. Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner.
The euro is irreversible.
In order to create the fundamental conditions for such risk premia to disappear, policy-makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination. As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist – with strict and effective conditionality in line with the established guidelines.
The adherence of governments to their commitments and the fulfillment by the EFSF/ESM of their role are necessary conditions. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed. Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures.
Let me now explain our assessment in greater detail …
For More Information
This is a follow-up to Monday’s post: Last week they spoke comforting words, but I saw only the frightening aspects of the euro-crisis.
For all posts see the new FM Reference Page Europe – on the road to division or unification.
These posts describe the essential aspects of the euro-crisis:
- 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