Eurocrisis

ECB's Draghi finally delivers on "whatever it takes"...

Today the ECB has finally arrived as a truly “European” Central Bank. It has acted against political opposition to deliver what is by most measures an ambitious programme of quantitative easing. The programme exceeded the predictions of most market participants and analysts, and it lies at the edge of our optimistic predictions. 

In short, Mario Draghi has finally delivered on his “Whatever it Takes” pledge. But suffice to say that this QE will not, by itself, be sufficient to deliver on the ECB’s own target. The ECB has finally, if belatedly, done its part. Now its time for the Eurozone to relax the fiscal constraint.

Objective 

The programme is as open ended in terms of delivering on the ECB’s core target of inflation “close to but under 2%”, as it was politically possible for the ECB to be and promises action all the way into September 2016. 

Everything you wanted to know about the ECB QE

What will the ECB announce today?

The ECB will announce broad outlines of a programme of Quantitative Easing today. The programme itself will focus on the ECB buying large quantities of financial assets, mostly Eurozone sovereign bonds, with freshly created money. The actual purchases will start in March and more details of the programme are likely to follow over the next few weeks.

What is the objective of this programme?

The stated objective of the programme is to increase Eurozone inflation from the dismally low level of 0.6% (in 2014) towards the ECB target of “close to but below 2%”. In December, inflation in the Eurozone actually turned negative at - 0.3% and longer-term market expectations of inflation have also been falling for several months now.

The ECB hopes that the QE will also have a direct impact on increasing investment and consumption in the Eurozone and thus help give a boost to growth. The combination of higher real growth as well as higher inflation, the ECB hopes, will also help improve the sustainability of debt in the troubled countries in the Eurozone.

Conversation with William (Bill) White

Note: This is an edited transcript of a wide-ranging conversation I had with Bill in April 2013 over coffee in Hong Kong 

Sony: This is Sony Kapoor of Re-Define talking to Bill White of BIS fame. He needs no further introduction. Bill, we are in this global situation where there is a huge amount debt in the system and central banks have flooded the system with money. At the same time, OECD countries are facing a structural slow-down of which the demographic time bomb is a part. They also have the highest levels of public and private debt. Simultaneously, power in global governance structures is starting to shift towards the East. Not to mention recent ructions in emerging markets.

Given that we are facing the triple challenge of the changes in governance, the structural break in growth rates, and unprecedented levels of credit and debt, particularly in OECD economies, how does the landscape look going forward? What is the best we can hope for?

Bill: To be honest, the landscape looks rather scary. Clearly, when you talk about this credit bubble we are at the end in the advanced markets, of a very long period of excessive credit creation. This has now crept over into the emerging markets as well. I think that in a certain way they have inherited it, through more or less the fixed exchange rate system, the imbalances of the advanced market economies; we have a global problem here. It is, however, most obvious in many of the advanced market economies.

So, we have a problem. Now the question is, what do we do to deal with the problem? I do not think that the quick fix, for example, the idea that you can use base money to expand government spending in a cost-less manner, or quantitative easing. I think these quick macro-fixes really are totally illusionary as a general solution. I believe that what we do have to focus on is the search for things that will actually work.

A Eurozone-wide IMF programme could save both

Note: This piece has been built on Re-Define's public call for an IMF programme for the Eurozone as published in the FT in 2012.

The IMF, historically the purveyor of crisis management for countries in financial trouble, is stuck in Europe. The IMF has, as today’s Charlemagne column in the Economist points out , become the junior partner in the ‘Troika’ arrangement and is often over-ruled, as was clear from the leaked IMF report on Greece. It was not always so.

The IMF is a body that is used to being in-charge. It has, over several decades, dictated policies to tens of countries that found themselves in a financial pickle. A visit from the IMF was an unpleasant experience and often involved a school-masterly dressing down of a country’s policy-making elite. For example, this image of the then IMF Managing Director Michel Camdessus standing, arms folded, over Suharto, appearing to dictate terms on the bailout during the Asian crisis is burned into the collective memory of Indonesians. It was even credited with helping hasten the end of the dictatorship.

Germany Must Embrace its Crown of Thorns

Note: This piece was originally published in the Economist as the opening piece in the Debate on Germany's role in Europe

Germany's pole position in the handling of the euro crisis is evident from the fact that everything is on hold until after the German elections, even as German red lines continue to define the contours of current policies in the euro area. Without Germany's economic might behind it, no solution to the euro area crisis is possible.

However, its influence on the political, intellectual and economic aspects of the handling of the euro crisis belies Germany's lack of leadership on these dimensions. The failure of intellectual leadership is perhaps the most pernicious of the three.

The absence of diversity and depth in the German debate on the euro crisis is striking. The inaccurate 'lazy southerner' narrative dominates public and private discussions, and the need for austerity is taken as a given, no matter what the evidence. 'Fuzzy' matters, such as the danger that sharp fiscal adjustment poses to social cohesion and political stability in crisis countries, get short shrift.

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