Friday, 7 September 2012

The ECB Won't Really Do "Whatever It Takes"

I can't understand why 'stock markets soared' 2% on yesterday's announcement by the European Central Bank (if there really was a causal link). 

Mario Draghi's threat/promise in late July that the European Central Bank would to do 'whatever it takes' to save the Euro always rang hollow. And yesterday's long-promised follow-up announcement on (some) of the detail only confirmed the lack of substance.

Doing 'whatever it takes' would involve the ECB buying the bonds of troubled Eurozone Zerozone countries unconditionally - regardless of whether those countries operate their economies responsibly. Of course that's a crazy notion, and a long way from what the ECB is really offering to do. Draghi added yesterday that troubled countries would actually have to formally request such purchases and accept "strict and effective conditionality", which roughly translates into all European languages as "austerity". 

Of course that's something Greece and Spain have shown a marked reluctance to accept - understandably. And there seems no real way to force them to do so without sending the boys around, which would shatter the single European fantasy ideal. As Graham Bishop has explained, this has always been the flaw in Zerozone monetary 'union'. There's no credible plan to discipline profligate states. Those who negotiated the Maastricht Treaty believed such states would ultimately behave in the interests of the Zerozone, just as Alan Greenspan thought the boards of Lehman Brothers and others would ultimately refrain from driving their firm into a wall in the interests of shareholders and taxpayers...

So it seems the giant EU foot is intent on kicking this particular urn down the road until it breaks. In the meantime, hopefully Greece and anyone else who is genuinely unable to cope will grasp the opportunity for an amicable parting to recover on their own terms.

Image from JMK Advisors.

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