A mixed bag.

It addresses the solvency issue and can bring rates down to whatever the ECB wants them to pay.

But the ‘conditionality’ likely continues the contractionary bias it’s already introduced.

If pressed as implied, this is a prescription for rising unemployment and political turmoil.

The euro zone has massive ‘demand leakages’ into pension funds, corporate reserves, cash in circulation,
the desire of foreign governments to hold euro balances, etc. that are a powerful contractionary bias.

They can only be offset by deficit spending by the domestic private sector, the foreign sector (net exports)
or the euro zone public sector entities.

In my humble opinion
nothing less than full public sector recognition of this ‘accounting identity’
is a necessary prerequisite to a constructive response.

ECB Says It May Buy Bonds If Strict Conditionality Ensured

Aug. 9 (Bloomberg) — The European Central Bank said it may intervene in bond markets in tandem with Europe’s bailout funds if troubled nations commit to improving their economies and fiscal positions.

“The adherence of governments to their commitments and the fulfilment by the European Financial Stability Facility/European Stability Mechanism of their role are necessary conditions,”

the Frankfurt-based ECB said in its monthly bulletin today, echoing President Mario Draghi’s remarks on Aug. 2. The central bank “may undertake outright open market operations of a size adequate to reach its objective.”

The ECB is stepping up its crisis response after Spanish and Italian bond yields surged, exacerbating a sovereign debt crisis that has forced five of the 17-euro members into seeking external aid. Draghi last week justified any potential intervention, saying rising borrowing costs in “several countries and financial fragmentation hinders the effective working of monetary policy.”

Still, “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,”

the ECB said. “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.”


Market Tensions


A further worsening of the crisis is likely to hurt economic growth in the euro area, “with the ongoing tensions in financial markets and heightened uncertainty weighing on confidence and sentiment,” the report said.

Today’s bulletin also contains the quarterly survey of professional forecasters. Their estimate for 2012 inflation remained unchanged at 2.3 percent. For 2013, they expect annual price gains to average 1.7 percent, down from 1.8 percent previously estimated, and for 2014 they predict 1.9 percent. The longer term inflation forecast remained at 2 percent.

On growth, the forecasters predict a 0.3 percent contraction for 2012, down from a 0.2 percent contraction expected last quarter. For 2013, they anticipate growth of 0.6 percent, down from a previous estimate of 1 percent. For 2014, they see the economy expanding 1.4 percent.

17 Responses

  1. Yes, it’s exactly what I warned against the minute after Draghi made the London annoucement. I repeat: there no hope in hell as long as the Eurozone persists. These technocrats know what they’re doing with excruciating precision and planning. I wish this was clear at your end too.

  2. So despite the ECB signaling it may buy sovereign Euro-zone bonds, the conditional feature which is really a “Catch 22” to clean up their fiscal profile, explains why the Euro is weak today.

  3. Yet a good intermediary precedent? You may make a believer out of me yet, Warren.

    The ECB may be capitalizing on “policy demand leakages” as the Bundebank camp is led step by step in the direction they vow not to go, but must. Like tacking into the wind to make it home. Except the ECB is tacking the Bundesbankers by the nose, backwards up their own policy gradient – so gradually that mutiny isn’t triggered.

    Europe seems to display the opposite of American methodology.

    We do the right thing after quickly exploring all other options.

    Europe’s remaining royalty slowly does the right thing, indirectly, after persistently insisting on doing the opposite.

    [Either that, or they launch a war! Luckily, they say they’ve sworn off that, outside the Balkans – ok, the Falklands too.]

    ps: best way to stop more war would be to accept both Turkey & Israel into the EEU? 🙂 Where would we donate if we didn’t have Israel to subsidize?

    ps: ps: Can you imagine Iran in the EEU & on the euro? Would solve a LOT of transparency issues. 🙂 Would be fascinating to see a Mullah-syllabic banking system in action. 🙂 Ate least SWIFT could replace DAFT.

  4. Translation: We will do what it takes to save the euro and we know how. But it will be on the condition of imposing a neoliberal agenda and central bank control, regardless of social cost and at the expense of democracy if need be.

    1. @Tom Hickey,

      Right, and a safe bet is that the European left will be jumping with joy, claiming this as a great victory for Europe and advising the electorates to accept a dose of austerity as the price to pay for a greater good.

      With friends like these one hardly needs any enemies.

      And the truly irritating part of this story is that the peripheral states could eschew the “help” of the ECB and the attached austerity by simply “printing” their way out via Target 2 balances.

      Target 2 has already enabled the financing of current account deficits in southern Europe and massive capital flight towards Germany. It could finance public debts as well if only the PIIGS’ governments willed it.

      If only…

      1. @WARREN MOSLER,

        Plus, there’s a whole lot of cash being “saved” due to tax avoidance and other illegal and “edgy” activities.Difficult to estimate what they may be but it is non-trivial and unaccounted for.

      2. @Unforgiven

        I was not thinking of derivative trades since I am not familiar with what goes on in the back room, but of money that “goes missing.” There are lot of ways that money can get diverted and some of it ends up as cash or bearer instruments.

  5. “In my humble opinion
    nothing less than full public sector recognition of this ‘accounting identity’ is a necessary prerequisite to a constructive response.”

    Not a chance. Any constructive talk inside the EZ (if there is any) could very well be worded in Esperanto for what people can understand.

    The objective goal of decision-makers is to change the EZ into an EUR exporters union. No other policy seems possible if the EUR is to be maintained.

    Assuming that importers can be found (maybe they can) and people don’t revolt in Spain or Italy (maybe they don’t) the interesting thing to observe next is if the “exporters disciplining wave” gets to France (and what the French will do if it does).

  6. One Spanish guy used to always ask his kid a rhetorical question: “Why does everyone in Spain always work for the Brits?”

    Answers: To be like the rest of Europe? And because even the Brits want to export to America?

  7. Ecb to obtain final permission have to comply German Public Opinion that want hard measure on Piigs.. and German Public Opinion is more stiff than its Merkel Government (all the Politicians say a thing but do another thing).. so Spain & Italy must ask formal aid.. to give up more bad used sovereignty.. suffer more cuts&tax (the Medium & Rich class over 250.000 euro in Italy is righ now very warried by a possible new Property Tax imposed by EU/FMI)..

    the summuray is a mix salad.. within 6 months new hard mesaure (recession&unemployment) to obtain aid from Ecb.. in the long term.. after the 2013 political election on spring in Italy (worry that after Monti will return Parties and over all Berlusconi) and on autumn in Germany (propaganda against Piigs financed by German Tax Payers) Euro finaly will be very strong and the speculation will stop for some years.. I think that on the long term, after 2014/15, Speculatiol will choose another Region to fight, my be England or Japan o Usa… stay tune.. good summer at all..

  8. Productivity in Norhtern Europe is working working saving and not spending …
    Now if everyone emulated them the global economy would be a fraction of its current size ..
    It’s in the culture not in the economics ..just don’t waste anytime looking for growth in this continent ..
    Solvency maybe but growth forget it

  9. The ECB wants southern europeans to work harder and for more hours in return for lower wages and benefits. That’s the whole point.

    But if the banks need some money then the ECB can always magic a few more trillion out of a hat, no questions asked.

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