ECB and Bank of England Previews

August 1, 2012

Six bold words last week from ECB President Draghi gave desperate investors hope: “Believe me, it will be enough.”  As Thursday’s policy decision and press conference approach, however, markets suspect an element of bluff and with good reason.  It is almost universally agreed that the common currency experiment was a colossal error on almost every criteria.  Much damage has followed, and the core problem can only be rectified by evolving the economic and monetary union further into a transfer union.  That’s what makes the United States’ single monetary policy with a single currency functional, and it’s what enabled the reunification of the D-mark and Ostmark in 1990 to work.  But Germany and other core EMU members will almost surely prefer that the euro break up than accept its continuation as a transfer union. 

With this fundamental disconnection in mind, heavy doubt surrounds all the gimmicks that politicians, central bankers and international creditors throw at the problem.  At the end of the day, unsustainably wide disparities in competitiveness are unlikely to be closed.  In Greece’s case, time is rapidly running out, and the euro hasn’t unraveled yet for the simple reason that the contagion effects of Grexit are still imagined but not known. 

The ECB is organizationally and philosophically modeled after the pre-1999 Bundesbank.  In those days, August vacations were sacrosanct, and a meeting would be skipped early in the month.  Mr. Draghi has many tools that can be used, but the feeling among analysts is that the Governing Council on which he has but a single vote out of 23 will not agree to tip its hand just yet.  Some actions may be taken now, but probably not the one step that could sustain investor hope into September.  It is highly doubtful that the ECB will launch massive purchases of Spanish and Italian bonds from the SMP facility with the intent of reducing long-term interest rates by a couple of hundred basis points in a hurry.  The ECB’s refinancing rate decision, most likely not to change, will be announced at 11:45 GMT Thursday, and the start of the press conference is set for 12:30 GMT.

Because it always issues a lengthy statement and holds an hourly press conference, the ECB cannot avoid making market-moving news.  The same cannot be said about the Bank of England, which only makes news immediately when it implements a policy change.  With London hosting the Olympics, this is not a time for British monetary authorities to steal attention.  The Monetary Policy Committee got that business out of the way in July when it raised the Asset Purchase Plan limit by 50 billion pounds to GBP 375 billion by a vote of 7-2.  To be sure, officials considered an increase of 75 billion sterling, but there is no immediate need to raise the limit until such is reached or nearly so.  Minutes of the August meeting providing details of the latest policy thinking will not be released until mid-month by which point the Olympic athletes and the eyes of the world will have left town.

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

Tags: ,


Comments are closed.