Greece Outside In: Mario Draghi needs a new trick to help the euro recover: quantitative easing

Sunday, January 12, 2014

Mario Draghi needs a new trick to help the euro recover: quantitative easing

The ECB president's high wire act worked brilliantly at keeping the markets on side, but with deflation looming, it's time for something else

Roll up, roll up! Come and thrill as Mario Draghi defies death. Hold your breath in wonder as the maestro wobbles his way along the high wire. With no safety net, can Draghi make it from one side of the big top to the other?

No question, Draghi is a class act. There have been a few wobbles, a bit of dicing with disaster, the odd gasp from the audience, but somehow he has stayed aloft. For the past 18 months, the president of the European Central Bank has kept the financial markets sweet and bought Europe's politicians time to sort out the deep structural problems of the single currency. In the main, he has done so by using words alone, and he has made it look easy.

The big question for 2014 is whether Draghi can continue to rule the markets simply by using the gift of the gab. The now legendary "whatever it takes" speech in the summer of 2012 prevented Italy and Spain from being sucked into the eurozone's sovereign debt crisis; last week, Draghi was at his silver-tongued best when he said the ECB would keep policy loose for as long as possible and was prepared to take more aggressive action if it proved necessary. The only consideration, Draghi noted, was that any planned response would have to be legal under the ECB's constitution.

It's easy to see why Draghi felt the need to speak. It is not just that the eurozone's recovery remains virtually undetectable; rather, it is that a combination of high unemployment, unused capacity and a strong euro is pushing the 18-nation single currency area closer and closer to deflation. Core inflation (the cost of living excluding fuel and food) in the eurozone is already at a record low of 0.7% and on course to go lower as the strength of the euro cuts the cost of imports.

Four eurozone countries – Greece, Spain, Portugal and Cyprus – already have negative core inflation. That makes life difficult in two ways: it raises the real value of their debts and it means that real (inflation-adjusted) interest rates are higher than they are in better-performing countries such as Germany, where core inflation is above 1%.

So Draghi's first aim is to talk down the level of the euro. That's not easy in current circumstances, with the Bank of Japan using quantitative easing to drive down the value of the yen and the Federal Reserve only gradually tapering away America's asset purchase programme. Any respite that the ECB president can provide to eurozone exporters will be modest, and temporary.

Two further questions therefore arise: is there a case for more decisive ECB action and, if so, what should the policy response be?

There is certainly a case for more stimulus from Frankfurt. Even leaving to one side the eurozone's structural weaknesses, growth is being impeded by three factors: currency strength, austerity and a more restrictive monetary policy than in the US, the UK or Japan. Businesses are not investing, credit flows are weak, unemployment is above 12%, and the banks are in a poor state.

In terms of the policy response, the ECB should learn from other central banks and embark on its own QE programme. To be sure, this is a bit late in the day. Without doubt, a law of diminishing returns applies to asset-purchase programmes. But Europe is drifting towards Japan-style deflation, where it gets locked into low growth and high unemployment. It is time for something new from the trick cyclist.

One reason for Sands's unusual choice of sidekick

Peter Sands sent out conflicting signals last week when he named Mike Rees as his deputy at Standard Chartered. In picking Rees, Sands – think Alistair Darling with a transatlantic accent – was promoting the man who runs the riskiest part of the bank and earns the most.

Rees, who is known for his unrelenting energy and optimism, has earned around £35m in the past four years, and largely escaped criticism for it, despite public distaste for high bankers' pay. This is because Standard Chartered is not a well-known name in the UK (although Liverpool FC shirts now carry its logo). And, of course, until this year, Standard Chartered had 10 consecutive years of record profits, which helped quell any debate about pay.

But in choosing Rees, Sands effectively ended any ambitions the bank's finance director, Richard Meddings, might have nursed to succeed him at the helm of the bank.

Throughout the banking crisis, Sands and Meddings were a double act who appeared to do little wrong. With the odd exception, they were credited with driving Standard Chartered to record profits while chaos reigned elsewhere. They even helped devise the bailout for failing high street banks in autumn 2008. They were unassailable – or so it seemed until 2012, when US regulators fined Standard Chartered £415m for breaching money laundering rules with Iran. Meddings was embarrassed when he was exposed as the unnamed executive exclaiming "you fucking Americans" when warned about the potential breaches.

Then last summer the pair had to admit that an acquisition in Korea – its largest ever, conducted in 2005 when both were on the board – was ruining the bank's run of 10 consecutive years of record profits.

Meddings – adamant that the decision to walk away from an 11-year career was his and his alone – had long been regarded as the successor to Sands, who presumably has been expecting to take the chairman's seat one day. Yet in promoting Rees, Sands may not have been naming an heir apparent: more a permanent understudy while the bank sorts out its succession.

All hail Bob Crow and his innovative economic policies

Bob Crow was back on the public enemy list last week after his RMT trade union announced two 48-hour tube strikes in February. For those commuters bemoaning the looming disruption to their working day, it is worth noting that Crow helps the British economy in his own way.

One consequence of the RMT's industrial muscle is that rail, bus and tube workers consistently achieve above-inflation pay settlements. Given the iniquitous consequences of wage stagnation since the 1990s – a glut of cheap credit that culminated in the banking crisis – it could be argued that Crow is addressing the signature economic issue of our time with a success that has escaped multiple governments on both sides of the Atlantic.

No one, the Conservatives and the CBI included, disagrees with the aspiration of better pay and a higher standard of living for all. And at the expense of the occasional difficult journey to work, Crow achieves it.