I’m late to the remarkable interview given by ECB president Mario Draghi to the Wall Street Journal. I find the choice of venue curious, since the Financial Times has become the venue for top European politicians and technocrats to communicate with English speaking finance professionals.
But Draghi’s drunk-on-austerity-Kool-Aid message was a perfect fit for the Wall Street Journal. While he wasn’t as colorful as Andrew Mellon’s famous “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” Draghi is still a true heir in believing that his prescription, per Melllon, will result in “High costs of living and high living will come down.” The “high living” that Draghi is particularly opposed to is Europe’s social safety nets.
The bizarre part about that is it is those very programs that kept Europe from being in even worse shape than it is now. I recall in early 2009 that American economic officials were hectoring Europeans, particularly Germans, for not doing enough in the way of economic stimulus. European readers argued that that reflected abject ignorance. Germany provides generous support to idled workers, and that spending was automatic. Germany performed far better than its US critics anticipated.
Not surprisingly, the Journal did not question the notion that democratic governments should take orders from an unelected finance official. But Draghi tried to make his views sound a tad more legitimate by blaming the planned ritual sacrifice as a demand of the market gods.
From the Wall Street Journal:
European Central Bank President Mario Draghi warned beleaguered euro-zone countries that there is no escape from tough austerity measures and that the Continent’s traditional social contract is obsolete…
He said Europe’s vaunted social model—which places a premium on job security and generous safety nets—is “already gone,” citing high youth unemployment; in Spain, it tops 50%. He urged overhauls to boost job creation for young people…
He argued instead that continuing economic shocks would force countries into structural changes in labor markets and other aspects of the economy, to return to long-term prosperity…
“There is no feasible trade-off” between economic overhauls and fiscal belt-tightening, Mr. Draghi said…
Can he really not see what happened in Ireland and Latvia, and what is taking place in Greece? Did he somehow not notice that Greece falls short of its growth targets every time the screws are turned tighter? This is like watching a medieval doctor apply more leeches to a patient that has already passed out from blood loss. There is no prosperity happy ending in this story, save for a very few at the top. And the process is not “belt tightening” but open warfare on basic social structures.
And we have the predictable threat:
“Backtracking on fiscal targets would elicit an immediate reaction by the market,” pushing interest-rate spreads higher, he said.
Um, what has led bond yields to fall is the LTRO, which has taken the concern of bank failures off the table and allows (actually, encourages) banks to take their “trash” collateral and use it to secure LTRO financing. That means banks can engage in a carry trade: buy periphery debt and use it to obtain cheaper LTRO lending. For Draghi to insinuate that the tightening of spreads has anything to do with fiscal targets is dishonest. It has everything to do with the ECB (for the moment, anyhow) supporting the banks and the markets. Investors believe they can rely on the Draghi put.
If the market reaction really were about fiscal sustainability, we’d still here nervous talk about Italy. Its bond yields are still in excess of 5%, and since its growth rate is nowhere near that level, so its debt to GDP ratio will continue to rise. But as long as the ECB stands ready to throw liquidity at any emergency, the markets will remain complacent.
The Journal did include some sane remarks, albeit well into long article:
“He’s just sugar coating the message,” said Simon Johnson, former chief economist at the International Monetary Fund.
“A lot of this structural reform talk is illusory at best in the short run…but it’s a better story than saying you’re going to have a terrible 10 years,” he said.
10? Remember, it’s been more than 20 in Japan. 10 could turn out to be a very good result indeed.