ECB Press Conference Sows Return to Chaos

Guest Post

The ECB did worse than nothing today, and one is left to conclude that the result was intentional and born out of extreme frustration with the foot-dragging of politicians to “push ahead with fiscal consolidation, structural reform and European institution-building with great determination,” that is with extreme dispatch. The only way to motivate governments is an implicit ultimatum that demonstrates the economic abyss into which the region will be thrown by non-compliance with conditions. How better to do that than to boost hopes that sends markets rallying in advance of the monthly ECB meeting and then to indicate that future help is not guaranteed and highly conditional on the behavior of others, all of which predictably sent markets careening downward?

The essential assertion of ECB President Draghi in London last week and at today’s press conference is that “the euro is irreversible,” but an absolutism such as that cannot by definition be taken seriously and at the same time be modified with conditions that are extremely unlikely to happen. Of course the euro is reversible, and it is so because it was never secured in the first place with a proper overwhelming voter mandate to give it political legitimacy. Few countries submitted ratification to the people, and in those few countries where a vote was taken such as Denmark the first time and France, the outcomes came up far short of what was needed for a legitimate birth.

The press conference was loaded with double talk. Today’s presented result turns out not to have been a decision but merely a guidance, a directive if you will to various committees at the ECB to explore the possibility of outright purchases of mostly short-term government paper. All details of such a program need to be worked out by the committees, but the timing of such revelations will not happen before all conditions are met, which realistically will be never. If miracle of miracles, the governments comply adequately with all these requests, the ECB still reserves the right not hold up its end of the bargain, so it merely says the Governing Council “may” act, not that it “will” act “to repair monetary policy transmission.” The guidance was presented at a united decision of committee members, except that one delegation — presumably the German one — voicing objections. While committee members each have a single vote, Germany wields enormous influence in the audience that counts, namely market reaction. Any dissent by Germany, and that is what expressed reservations really constitute, is guaranteed to be interpreted in the marketplace like a security council veto in the U.N. by one of its permanent members.

The boiler plate portion of the ECB statement did not break fresh ground. The interest rate structure was left unchanged, and no non-standard actions to be taken immediately were announced. The statement acknowledges that the economy is weak and facing heightened uncertainty, but the R-for recession word does not appear. Also, officials stick to their prediction of gradual recovery beyond the short term. Growth risks remain skewed to the downside but not so much so as to budge their view that price risks are balanced around the baseline view of a return to a sub-2% CPI pace in 2013. Monetary expansion is deemed subdued, and the overall monetary analysis merely confirms the findings of the economic analysis.

It has been said that the only way the U.S. Congress will act on the coming fiscal cliff is if the stock market were to plunge by 500 points a day over several sessions. Bad economic data will not suffice. It seems that the ECB Council has followed this logic that the only way to get promised action from politicians is to manufacture a crisis. At 10:45 today prior to the ECB show, European stocks were up to 1% higher on the day. Slightly less than four hours later, share prices are down 3.4% in Spain, 2.9% in Italy, 1.3% in France and 1.4% in Germany. 10-year regional bond yields have jumped; the German bund, for example, is seven basis points higher than its pre-ECB quote.

Copyright 2012, Larry Greenberg Currency Thoughts. All rights reserved. No secondary distribution without express permission.

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Kenny Fisher

Kenny Fisher

Currency Analyst at Market Pulse
Kenny Fisher joined OANDA in 2012 as a Currency Analyst. Kenny writes a daily column about current economic and political developments affecting the major currency pairs, with a focus on fundamental analysis. Kenny began his career in forex at Bendix Foreign Exchange in Toronto, where he worked as a Corporate Account Manager for over seven years.