“No one’s better than Draghi at saying little, doing nothing and getting results; he’s the only central banker who understands central banking” tweeted Jim Rickards, one of the most prominent analysts and financial writers of our time, a few days ago.
Indeed, Mario Draghi has so far proved to be a master at being loud, alluding to ECB’s imminent intervention in the markets, then doing absolutely nothing, and letting anticipations guide the market. And he has been extremely successful, at least at keeping the euro afloat and managing the confidence crisis in the common currency.
Among his boldest statements, one remembers his July 2012 declaration in which he planned to do “whatever it takes” to save the euro, a statement credited with changing the course of the eurozone’s crisis, without the ECB actually having to purchase a single government bond. In a similar situation, the Fed had to buy up to $85 billion treasury bonds per month in order to stabilize the US economy. Again, last month, Mr. Draghi declared that the ECB was ready to take action and use tools such as government bond purchases to “prevent inflation from falling too much,” a timid way of showing support to government spending programs for creating some growth in the recession-stricken eurozone. Practically, we are still waiting to see some real action in this direction.
All that was fine up to the European Parliament elections, a week ago. Sunday’s 25 May vote came as a shock, although a largely expected one. First, low and declining turnout (only 43 percent this time) is the clearest signal that euroscepticism is on the rise across Europe. Then, and most strikingly, the results positioning extreme-right and left parties on the top in countries such as France, the United Kingdom, Hungary, or Greece is a loud protest against what is elegantly named “the common disinflation experience,” that is: unemployment, worsening working conditions and declining living standards—after all, the EU project was an implicit promise of growing income, less inequality, and better life. The protest vote was also targeting Brussel’s bureaucracy and EU politicians, whose decisions and policies are hardly explained and understood by the peoples of Europe. In sum, the protest vote is a clear and loud request for changing policy—but in which direction?
Here starts the confusion. For most people, changing policy means a departure from Germany’s dictated austerity programs, which comes down to higher public spending and increasing deficits. Which in turns means adding more debt to the existing mountains of debt. But is this a viable solution or a temporary relief measure that will end up with more austerity programs in the future? There is another contradiction too: not all European countries are on the same path; if Italy, France and the South of Europe need “pro-growth” measures, Germany and its close partners are happy to have a rather booming economy. How can we apply a common monetary policy to both cases?
The second approach is to urge governments to hear the message and respond to it through structural changes, that is reforms that will enhance productivity and competitiveness, such as more flexibility in labor markets, opening branches to competition etc. But such reforms aren’t usually welcome by those concerned, and tend to intensify workers’ hardship, at least in the short term. Without the proper explanation to citizens (which is usually the case), intensifying reforms now would be interpreted as “more of the same thing,” which after the rise of extreme parties could be politically suicidal.
Thus, there is not much room for manoeuvre. Under the pressure of public opinion and the enhanced position of eurosceptic parties in the European Parliament, the most probable option will be to “outsource” policy responsibilities to Mr. Draghi’s ECB, who will eventually have to act in the markets rather than regulating the markets through statements. What will be the scope and the effectiveness of such a monetary-only policy to a “reform-averse” Europe, remains to be seen. Did at least the so-called political elites get the elections’ message? Judging from their first reactions to the vote (like those of French politicians speaking about a “wound” or a “fracture”), we cannot be sure. Happily, there is the ECB.
Bon courage Mr. Draghi!
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