Note that past remarks indicate the euro leaders equate ‘success’ with ‘strong euro’, particularly the ECB, with its single mandate.
So with the euro reacting positively to Draghi’s ‘pledge’, which came after a decline in the euro, more of same is encouraged.
Eurogroup chair sees decisions soon in debt crisis
By Geir Moulson
July 29 (AP) — The German and Italian leaders issued a new pledge to protect the eurozone, while the influential eurogroup chairman was quoted Sunday as saying that officials have no time to lose and will decide in the coming days what measures to take.
The weekend comments capped a string of assurances from European leaders that they will do everything they can to save the 17-nation euro. They came before markets open for a week in which close attention will be focused on Thursday’s monthly meeting of the European Central Bank’s policy-setting governing council.
Last Thursday, ECB President Mario Draghi said the bank would do “whatever it takes” to preserve the euro — and markets surged on hopes of action.
German Chancellor Angela Merkel and Italian Premier Mario Monti “agreed that Germany and Italy will do everything to protect the eurozone” in a phone conversation Saturday, German government spokesman Georg Streiter said, a statement that was echoed by Monti’s office.
That was nearly identical to a statement issued Friday by Merkel and French President Francois Hollande, which followed Draghi’s comments.
The pledges ‘to do whatever it takes’ we have been hearing for quite some time now. It all moves very slow though and in an ugly way. It’s all still very reactive instead of pro-active. Reluctantly watering the plant when it’s about to die, no necessary ongoing water-supply.
We still do not see:
– time line for euro tsy with euro bonds
– bank license for ESM
– annual distributions from ECB to member states
– tax backed bonds from the member states
Markets are tired of lip service. Seems to me markets remain patient because they know it can be solved and because the consequences of running out of patience are considered still worse.
But how long can such uncertainty drag on?
Sep 12 looks like an important day. German court ruling on ESM and Dutch elections. Latest dutch polls showing anti-euro parties in the lead.
This is all political – the Europeans (and all of us) are not out of the woods, yet.
“A lot depends on what will happen over the next few weeks”
I would trust J. K. Bielecki even if in the past he was implementing neoliberal reforms in Poland and he speaks the usual language of neoclassical economics. I can say that his personal integrity should not be questioned. He actually understands very well the dynamics of European politics.
We all the time read that ECB is working together with ESM/EFSF on further actions. Many assume that they will cooperate in bond buying. ESM buying on the primary market and ECB on the secondary market.
In the past ECB has been buying bonds of certain member states. It came together with austerity demands and they always ‘sterilized’ it by withdrawal of euros via taking in interest-bearing deposits from banks. This all ‘to prevent inflation’ as they said.
(I do not know whether these previously used interest-bearing deposits refer to the deposit facility for which interest was reduced to zero early July)
How do you see the chances that ECB will come with Eurobonds?
The Chinese central bank also issues bonds.
For equal amounts ECB will buy bonds of certain member states to cap their interest costs.
Currency users will be very happy with the ECB as counterparty. They finally are not forced to take credit risk.
Germany cannot complain about increase of the money base. Their so called required ‘Sterilization’ is there right away.
It may trigger a sell off in German bonds though when they lose their TINA status.
Wouldn’t that be a very MMT solution?
Along the MMT lines this would be the same as a euro tsy issuing euro bonds.
For mainstream economists and Germany this would be very different. They think that such euro tsy is dependent on lenders and will end up with interest costs around some average that member states currently pay.
they don’t need euro bonds,
‘sterilization’ is of no consequence,
so they can simply make payments to buy bonds or anything else,
which results in additional euro balances on the ecb’s books.
I agree with you about the sterilization, but Germany is not likely to agree to that. They think that such increase of base money is inflationary.
understood, even with all the evidence that it is not. not sure what they really think, however
It is true that they don’t need bonds from the aggregate demand point of view and that abolishing them would have no major macroeconomic consequences.
However money is a historic, social and legal concept. Money is primarily used to denote contractual obligations between parties. From that point of view they may want to preserve the current illusion that governments have to “borrow” before spending. I would go further – this illusion or moral concept is a foundation of Germanic thinking about the relationship between individuals and the state. They have eliminated concepts used in the dark period 1933-1945 not by confronting them but “forgetting” about them. That’s why they obsessively talk about hyperinflation and Weimar Republic but don’t mention how Dr. Hjalmar Horace Greeley Schacht stimulated the economy so that it left the ruts of the Depression (there is an early paper written by Michal Kalecki). Therefore the modern German state must be a neoliberal one or all the unpleasant questions about the very successful role of the state in the 1930s have to be asked again.
Think about laws governing marriage in Saudi Arabia (4 wives allowed) – how they differ to the concept of Western marriage which may include homosexual marriage recognised in some jurisdictions.
That’s why we must understand that reductionism is not a correct answer if we want to understand “why”. To reiterate – money is also a moral and legal concept existing in the historic framework, not only just entries on the balance sheets (which are also a historic and legal concept).
Anyway I 100% agree with your macroeconomic analysis.