Friday, April 4, 2014

Draghi Rebukes Lagarde and is Weidmann Going Soft?

by Pater Tenebrarum

Thanks a Bunch, but Keep the Advice to Yourself Please …

The most amusing moment of Mr. Draghi's press conference after yesterday's ECB board meeting, was when he proceeded to put down the IMF's Ms. Lagarde who had only one day prior to the meeting admonished the ECB to step up its money printing efforts so as to counter allegedly 'too low' inflation (see “Lagarde Worries About ‘Not Enough Inflation’ Again”).

The ECB once again left policy unchanged, instead continuing to rely on threats and/or promises (depending on whether one is a saver or a debtor, one can interpret its announcements as either one or the other) of what it would do if 'required'. As the WSJ reports, Draghi actually looked 'cross' for once, seemingly losing his usual detached cool. We think it's just theater, but anyway, here is what the WSJ wrote:

“For a moment Thursday, European Central Bank President Mario Draghi, arguably one of the coolest, most collected central bankers on the planet, looked cross.

Mr. Draghi was explaining to reporters why the ECB’s governing council had decided to take no action in response to a decline in the inflation rate to 0.5%, a quarter of the rate it targets. It’s a job he does well, and indeed, by the end of the monthly news conference, Mr. Draghi had managed to convince investors that the central bank may yet loosen policy further, as evidenced by the fact that as he left the podium, the euro was weaker than before he had started.

But along the way, Mr. Draghi was asked one question that appeared to set him on edge: how did he respond to a suggestion by the head of the International Monetary Fund Wednesday that the ECB should loosen policy, and quickly?

With a little sarcasm, is the short answer.

“I think the IMF has been of recent extremely generous in its suggestions on what we should do or not do,” he said. “And, we’re really thankful for that. But the viewpoints of the Governing Council are in a sense different. Frankly, I would like the IMF to be as generous as they have been towards us also with other monetary policy jurisdictions, like for example issuing statements just the day before an FOMC meeting would take place. Anyway, I think we would certainly value the advice of the IMF and certainly it’s an important contribution to our analysis.”

(emphasis added)

As the WSJ points out though, the IMF actually isn't shy to dispense unsolicited advice to the Fed either, and in fact often does so close to FOMC meetings. In any case, it would be a big mistake to conclude from this that Draghi and Lagarde actually differ a great deal in their views. Our feeling is that Draghi merely wants to 'keep his powder dry' so as to be able to deploy further monetary loosening measures when the next panic strikes. As long as the waters are calm, why should the ECB do anything? The members of the council would probably see that as a waste of ammunition.

Draghi certainly didn't hold back in terms of promises of what the ECB might yet end up doing (we are confident that it will indeed eventually implement all these steps).

'Unconventional measures' would be deployed, Draghi pointed out, all well 'within the central bank's mandate' – including 'QE' type interventions and the introduction of penalty rates ('negative interest rates') on excess reserves held by banks at the ECB.  We think this latter proposal is certain to fail to have any effect, because banks will simply move their funds from the ECB's deposit facility to the current account facility.

In any case, the object of these deliberations is precisely the same alleged 'problem' mentioned by Ms. Lagarde: 'too low inflation'. According to Draghi, the ECB board is merely not sure yet whether the recent decline in the euro area's HCPI is a 'transitory' or a 'structural' phenomenon.

However, according the pundits at Bloomberg, “Europe's war against deflation” (laughing out loud is hereby expressly encouraged), is “already lost”. One can of course always hope, but somehow we doubt that the ECB's printing press is as rusty as these pundits assume. Meanwhile, the year-on-year growth rate of the  euro area's true money supply remains at 6% at the time of writing. Some deflation!

Euro Area TMS-a

The euro area's true money supply. All that 'deflation' could make one dizzy! - click to enlarge.

Is Jens Weidmann Going Soft?

This brings us to BuBa president Jens Weidmann, who recently signaled that he would be prepared to vote in favor of both types of policy 'if necessary'. The financial press was duly astonished at this seeming u-turn:

“The European Central Bank could buy loans and other assets from banks to help support the euro zone economy, Germany's Bundesbank has said, marking a radical softening of its stance on the contested policy.

Jens Weidmann, who is a member of the European Central Bank's Governing Council, told MNI in an interview published on Tuesday that the ECB could consider purchasing euro zone government bonds or top-rated private sector assets.


With little room for the ECB to cut interest rates further from a record low 0.25 percent, Weidmann called in the interview, which MNI said was conducted on Friday, for a debate about the effectiveness of other policy tools. "The unconventional measures under consideration are largely uncharted territory. This means that we need a discussion about their effectiveness and also about their costs and side-effects," he said.


Quantitative easing, or QE, is when a central bank buys loans or other assets from banks. It would represent a radical departure for the ECB, which has so far, not least because of resistance from Germany, refused to take such a step.

Weidmann has been one of the chief opponents of such a move and his change of tack signals a possible future shift in the ECB's stance, just at the time that the U.S. Federal Reserve is paring back its own programme of asset buying.


The central bank has started to pay closer attention to the euro exchange rate and its impact on the outlook for inflation, and Weidmann said a negative deposit rate could be a way to address the impact from a strengthening currency.

"If you wanted to counter the consequences of a strong appreciation of the euro for the inflation outlook, negative rates would, however, appear to be a more appropriate measure than others," he said. "But we are talking about hypothetical scenarios here and not about imminent decisions."

A negative deposit rate would mean that banks have to pay to park their funds at the ECB overnight. The impact such a step would have to improve bank lending to companies and households is "debatable", Weidmann said.”

(emphasis added)

With Weidmann changing his tune, there is seemingly no longer an obstacle to the deployment of 'QE' by the ECB. So has Weidmann really changed his views?

We are actually not so sure about that. These statements may well have been the result of careful political calculations on Weidmann's part. While we don't want to rule out that the German government has given him a talking to behind closed doors and 'ordered' him to change his stance, there are other possibilities as well.

For one thing, Weidmann may feel that by signaling that he is dropping his opposition to 'QE', the actual implementation of the policy may become 'unnecessary', due to the market reaction his statement provokes. In other words, if his comments lead to a weakening of the euro, the ECB will be less inclined to actually push for 'QE'.

For another, Weidmann is surely aware at this point that the council would simply outvote him if/when push comes to shove. Since it is already certain that he will be outvoted, he has nothing to lose by signaling his seeming 'conversion'. On the contrary, it may help him increase his clout, since it can no longer be argued that he is simply refusing to support any measures proposed by others on the ECB's board. He is a team player now, instead of a continual thorn in the side of the council. As Commerzbank chief economist Jörg Krämer remarked in this context:

You don’t always want to be the dissenter. If everyone thinks you’re always going to vote against the majority, then you lose your influence. The Bundesbank has been communicating their position in a way that is less harsh. They don’t want to be perceived as against anything per se, but rather stress that conditions need to be fulfilled before you act.”

However, Mr. Weidmann may soon find that push indeed will come to shove and that he will then be forced to actually declare himself one way or the other by actually having to vote on such unconventional measures.


The euro against the dollar, weekly. The current level is seen as much too strong by Europe's mercantilist politicians – click to enlarge.

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