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Eurocrash: Draghi at odds with Merkel   Wednesday 29 August 2012 In exploring today's statement in Die Zeit, we must remind ourselves that Mario Draghi is a member of the quartet of EU presidents charged with formulating a new EU treaty. And, according to Manfred Neumann, "He thinks only politically … He is always there when in Brussels rescue plans are being discussed, making suggestions and influencing proceedings". Further, the ECB, of which Draghi is president, is an EU institution required under Article 13 of the consolidated treaty (p. 23) "… to promote its (the Union's) values, advance its objectives, serve its interests, those of its citizens and those of the Member States, and ensure the consistency, effectiveness and continuity of its policies and actions". For Draghi then to assert, as he does in his statement, that: "The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union", is not quite to capture the essence of the bank's role, or that of its president. When he goes on to claim that the bank "will remain independent" and that "it will always act within the limits of its mandate", we can recognise a consummate practitioner in the arts of mendacity. What is really interesting though is why Draghi feels impelled to utter such obvious lies. Does he believe them himself? And does he think we will believe them? If not, what does he think will be our response? Another point of interest is the disparity in the perception of the piece as between ourselves and others. In common with other commentators , for instance, Reuters focuses on Draghi's argument that the ECB must employ "exceptional measures" at times to fulfil its mandate. In our view, the key part of the piece comes earlier, when he notes that solutions to the euro crisis are deemed unsatisfactory because they offer binary choices: "either we must go back to the past, or we must move to a United States of Europe". Draghi's response to this is that, "to have a stable euro we do not need to choose between extremes". Agreeing that we cannot go back to the status quo ante, he then sets out a series of adjustments to the architecture of the single currency which fall way short of a new, overarching EU treaty. What this does is catapult Draghi into direct conflict not just with the Bundesbank but with Angela Merkel herself. It is she who occupies one of the "extremes", calling for precisely the United States of Europe that Draghi dismisses as unnecessary, something she has been consistent in favouring. Then of historical interest is the admission that, even though sharing a currency would imply a high degree of joint decision-making, needing "strong common democratic underpinnings", a "deliberate choice was made in the 1990s not to give the euro such features". Thus, we get an acknowledgement that the euro was born to fail. But this is not entirely unrelated to Merkel's call for political union. She is of the view that fiscal and political union are insperable, a nostrum that is shared by Jörg Asmussen, Germany's representative of the ECB board – where no further integration can be secured without the "democratic legitimacy" of a treaty completing the political union of eurozone members. This, then, is the singular, most important point to emerge from Draghi. There is a major fault line between him and the most powerful of the member states – Germany. And if Draghi, as a member of the quartet, represents the view of the EU commission (and van Rompuy), we are in for some interesting times. COMMENT: "DRAGHI" THREAD Richard North 29/08/2012

Eurocrash: Draghi fights back   Wednesday 29 August 2012 Evidently, Draghi's "heavy workload" isn't so heavy as to prevent him from authoring a commentary for Die Zeit, posted in English on the ECB website. With Jens Weidmann in the other corner, to have two heavyweights slugging it out in public must be unprecedented. I cannot recall any such thing ever having happened before. Reproduction of the Draghi piece is permitted, provided that the source is acknowledged, says the ECB. I don't think a précis can do it justice, so I reproduce it in full below: Across Europe, a fundamental debate is taking place about the future of the euro. Many citizens are concerned about where Europe is heading. Yet the solutions presented appear to them unsatisfactory. This is because these solutions offer binary choices: either we must go back to the past, or we must move to a United States of Europe. My answer to the question is: to have a stable euro we do not need to choose between extremes. The reason this debate is taking place is not the euro as a currency. The objectives of the single currency remain as relevant today as they were when the single currency was agreed. To spread price stability and sustainable growth to all European citizens. To reap the gains of the world’s largest single market and make the historic process of European unification irreversible. To raise Europe's standing – not only economically but also politically – in a globalised world. The debate is taking place because the euro area has not yet fully succeeded as a polity. Currencies ultimately depend on the institutions that stand behind them. When the euro was first proposed, there were those who said it would have to be preceded by a long process of political integration. This was because sharing a currency would imply a high degree of joint decision-making. Member countries would be a "Schicksalsgemeinschaft" and would need strong common democratic underpinnings. But a deliberate choice was made in the 1990s not to give the euro such features. The euro was launched as "a currency without a state" to preserve the sovereignty and diversity of member countries. This informed the so-called "Maastricht setup", which laid the euro's institutional foundations. But as recent events have shown, this institutional framework left the euro area insufficiently equipped to ensure sound economic policies and effectively manage crises. For this reason, the way ahead cannot be a return to the status quo ante. The challenges of having a single monetary policy but loosely coordinated fiscal, economic and financial policies have been clearly revealed by the crisis. As Jean Monnet said, coordination "is a method which promotes discussion, but it does not lead to a decision". And strong decisions have to be made to manage the world’s second most important currency. A new architecture for the euro area is desirable to create sustained prosperity for all euro area countries, and especially for Germany. The root of Germany's success is its deep integration into the European and world economies. To continue to prosper, Germany needs to remain an anchor of a strong currency, at the centre of a zone of monetary stability and in a dynamic and competitive euro area economy. Only a stronger economic and monetary union can provide this. Yet this new architecture does not require a political union first. It is clear that monetary union does entail a higher degree of joint decision-making. But economic integration and political integration can develop in parallel. Where necessary, sovereignty in selected economic policy fields can and should be pooled and democratic legitimation deepened. How far should this go? We do not need a centralisation of all economic policies. Instead, we can answer this question pragmatically: by calmly asking ourselves which are the minimum requirements to complete economic and monetary union. And in doing so, we will find that all the necessary measures are firmly within our reach. For fiscal policies, we need true oversight over national budgets. The consequences of misguided fiscal policies in a monetary union are too severe to remain self-policed. For broader economic policies, we need to guarantee competitiveness. Countries must be able to generate sustainable growth and high employment without excessive imbalances. The euro area is not a nation-state where persistent cross-regional subsidies have sufficient popular support. Therefore, we cannot afford a situation where some regions run permanently large deficits vis-à-vis others. For financial policies, there need to be powers at the centre to limit excessive risk-taking by banks and regulatory capture by supervisors. This is the best way to protect euro area taxpayers. There also needs to be a framework for bank resolution that safeguards public finances, as we see in other federations. In the US, for example, on average about 90, mostly smaller, banks per year have been resolved since 2008 and this had no impact on the solvency of the sovereign. Political union can, and shall, develop hand-in-hand with fiscal, economic and financial union. The sharing of powers and of accountability can move in parallel. We should not forget that 60 years of European integration have already created a significant degree of political union. Decisions are made by an EU Council filled by national ministers and by a directly elected European Parliament. The challenge is to further increase the legitimacy of these bodies commensurate with increasing their responsibilities and to seek ways to better anchor European processes at the national level. A more solid political foundation should allow for agreement on a basic principle: that it is neither sustainable nor legitimate for countries to pursue national policies that can cause economic harm for others. This constraint has to be built into how countries design their economic and social models. The only sustainable model is one that is consistent with the terms of a common currency. Countries have to live within their means. Competition and labour markets have to be reinvigorated. Banks have to conform to the highest regulatory standards and focus on serving the real economy. This is not the end, but the renewal of the European social model. From the ECB's perspective, a strong economic union is an essential complement to the single monetary policy. Building this will require a structured process with correct sequencing. Yet citizens can be certain that three elements will remain constant. The ECB will do what is necessary to ensure price stability. It will remain independent. And it will always act within the limits of its mandate. Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole. The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity. Those who want to go back to the past misunderstand the significance of the euro. Those who claim only a full federation can be sustainable set the bar too high. What we need is a gradual and structured effort to complete EMU. This would finally give the euro the stable foundations it deserves. It would fully achieve the ultimate goals for which the Union and the euro were founded: stability, prosperity and peace. We know this is what the people in Europe, and in Germany, aspire to. I'm now going to go away and think about this, and respond with an analytical piece. COMMENT THREAD Richard North 29/08/2012

Eurocrash: confused waters   Wednesday 29 August 2012 Where strong currents meet, the result – as any mariner will tell you – is often confused waters, a phenomenon especially prevalent when the tide is on the turn. And, although it is early days yet, I am beginning to sense a turning point. This is no more than a hint, but there is a new mood of determination and direction abroad. At last, the "colleagues" have a plan B, they know what they want to do. Over the next few months, they will roll it out, for it then to culminate in the grand announcement of the EU treaty convention at the December Council. Highly apposite in the context is the Financial Times Deutschland which is pointing to a growth in competitiveness in the eurozone, and a highly optimistic piece about Italy in FAZ declaring that "the end of the crisis is in sight". With a general election in the spring of 2013, Monti – currently in Berlin for talks with Merkel – is confident of returning to office, a confidence he will share with the German chancellor. According tothe latest poll, the CSU gets a 39 percent share of the vote, up three points on the previous week and the best showing since July 2008. Together with the FDP, the CSU is on 44 percent, six points ahead of the SPD and the Greens. Even though the news from Spain is dire, with massive capital flight being reported, attended by strong rumours of a bailout, this must strengthen Merkel's hand. The chancellor is further helped by her party closing ranks after Dobrindt's outburst at the weekend. We have CSU chairman Horst Seehofer reaffirmed support for her "successful policy of euro stabilisation". That the "colleagues" feel themselves on the up is not news that most will want to hear, but thedanger is ever-present. The much-heralded collapse of the euro is always a possibility, but this always was a high-stake game, reliant on the beneficial crisis to deliver results. If pushed, I would have to concede that the balance is tilting in favour of the "colleagues". Tomorrow - or even later today - I may feel different, but that is how it seems to me at the moment. COMMENT THREAD Richard North 29/08/2012

Eurocrash: a fog of incomprehension   Wednesday 29 August 2012 All of a sudden, the media has woken up to the ECB/Bundesbank drama and the international (and especially the German) press is flooded with stories. But, having followed the ins and outs all day yesterday, we're none the wiser. Nor, it seems, is anyone else – the more one reads, the murkier it gets. Handelsblatt, as so often, leads the way with a long report (headlined above). It tells us that the ECB is probably the only EU institution that can prevent the worst - a breakup of the eurozone. But any thought of intervention is not only attracting the opprobrium of the Bundesbank and all the usual suspects. Added to the list of naysayers is the doyen of the CSU, Max Strauss who grandly declares: "The ECB's crisis policy is attack on democracy". Then there is Jürgen Stark, ex-ECB chief economist. His former employer, he says, is treading a "very dangerous path" in "allowing its independence to be eroded by politicians". He adds that bond purchases are effectively monetary financing - where the central banks print money to pay off a sovereign debt - something expressly forbidden in the ECB mandate. What has got the commentators all a twitter, though, is the news that ECB president Mario Draghi was due speak at Friday's annual Jackson Hole symposium in Kansas City, but has cancelled his appearance because of a "heavy workload". Since Bundesbank chief Jens Weidmann still plans to go, this has raised all sorts of wild rumours, to the effect that Draghi is planning something major, and something soon.  Predictably, though, no details have emerged, leaving the whole situation up in the air. If he has a plan, it doesn't even have a name as yet. That situation has not been particularly helped by first Hollande and then van Rompuy telling us that the euro is "irreversible". Alongside the euro, such assurances are a seriously debased currency. Back to Handelsblatt and we get Jörg Krämer of Commerzbank expecting the eurozone to mutate over the next twelve months, becoming a "liability union". Kramer thinks there are similarities with Italy of the 70s and 80s, and he thus dubs this version of a future construct an "Italian Monetary Union". It is believed that this option could prevent the insolvency of the peripheral countries, but the finance ministers and central bankers of the core countries would be liable for their debts. "This liability union through the back door will push the cost of financing the peripheral countries and stem the sovereign debt crisis," says Kramer. Like as not, in this scenario, we see a cut in interest rates and a weaker euro, followed by galloping inflation in the medium to long-term. Commerzbank does not see this as a sustainable option, and offers alternatives, as in the "phoenix-from-the-ashes-Union" and a "salami-Union", the latter resulting in countries like Greece gradually abandoning the euro. Greece would be the first of these countries, whence a "frustrated international community" would then probably turn off the money tap. Another scenario is the "injured Union". Here, governments agree too late to help the peripheral countries, and monetary union collapses. There was a risk that this could happen by accident, but it probably would not happen because the political élites in their own interest would do everything they could to prevent it. That, though, is all we have – speculation and theorising but no hard detail. The more we learn, the less we know, and the frustration mounts. But that leaves Hans-Olaf Henkel in Handelsblatt who is reminded of TV wrestling, where the fighting is just for show. It is shadow boxing and not at all real. Add yet another piece which has the Bundesbank shooting blanks, and the consensus becomes that no one can predict what is going to happen. That really is the best we can do, even if Merkel isnow saying that that the hardships experienced by the Greeks make her "gentle heart bleed". Bless! COMMENT THREAD Richard North 29/08/2012

Climate change: one of the best   Tuesday 28 August 2012 Getting in quick, the warmists have saturated the media with their tales of woe about Arctic ice – the claimed lack thereof – asserting that this has something to do with global warming. For those of us who know better, this is an absurd proposition but it makes no difference to argue it either way. We have ourselves here a dialogue of the deaf. Those who believe current ice levels arise from man-made climate change will continue to believe that. Those of us who disagree will continue to disagree. As always, you pays your money (or not) and pick the headlines that suit you, as with the rainy summer. According to the Failygraph, we are heading for the wettest on record, while the Gruaniadtells you (under the headline "weatherwatch") it cannot beat the record set in 1912. When it comes to headlines, though, you would have a job beating Süddeutsche Zeitung, which has us believe that the levels of Arctic ice amount to a problem more serious than the euro crisis. This is a timely reminder, if nothing else, of how much trust we can place in newspaper headlines. COMMENT THREAD Richard North 28/08/2012