Draghi Departs the Solar System

Posted on by

Yves here. The video embedded at the end of the post starts when you load this page. Sorry, I don’t seem able to suppress that on my end.

By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness.

Last night the ECB met in Barcelona and once again held on rates. Mario Draghi opening statement is below.

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. I would like to thank Governor Fernández Ordóñez for his kind hospitality and express our special gratitude to his staff for the excellent organisation of today’s meeting of the Governing Council. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Rehn.

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Inflation rates are likely to stay above 2% in 2012. However, over the policy-relevant horizon, we expect price developments to remain in line with price stability. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Available indicators for the first quarter remain consistent with a stabilisation in economic activity at a low level. Latest survey indicators for the euro area highlight prevailing uncertainty. Looking ahead, economic activity is expected to recover gradually over the course of the year. At the same time, as we said previously, the economic outlook continues to be subject to downside risks.

Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Over the last few months we have implemented both standard and non-standard monetary policy measures. This combination of measures has helped both the financial environment and the transmission of our monetary policy. Further developments will be closely monitored, keeping in mind that all our non-standard monetary policy measures are temporary in nature and that we maintain our full capacity to ensure medium-term price stability by acting in a firm and timely manner.

Let me now explain our assessment in greater detail, starting with the economic analysis. Available indicators for the first quarter remain consistent with a stabilisation in economic activity at a low level. Latest signals from euro area survey data highlight prevailing uncertainty. At the same time, there are indications that the global recovery is proceeding. Looking beyond the short term, we continue to expect the euro area economy to recover gradually in the course of the year, supported by foreign demand, the very low short-term interest rates in the euro area, and all the measures taken to foster the proper functioning of the euro area economy. However, remaining tensions in some euro area sovereign debt markets and their impact on credit conditions, as well as the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment, are expected to continue to dampen the underlying growth momentum.

As we said previously, this economic outlook continues to be subject to downside risks, relating in particular to an intensification of tensions in euro area debt markets and their potential spillover to the euro area real economy, as well as to further increases in commodity prices.

Euro area annual HICP inflation was 2.6% in April 2012, according to Eurostat’s flash estimate, after 2.7% in the previous four months. Inflation is likely to stay above 2% in 2012, mainly owing to increases in energy prices, as well as to rises in indirect taxes. On the basis of current futures prices for commodities, annual inflation rates should fall below 2% again in early 2013. In this context, we will pay particular attention to any signs of pass-through from higher energy prices to wages, profits and general price-setting. However, looking ahead, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain limited.

Risks to the outlook for HICP inflation rates in the coming years are still seen to be broadly balanced. Upside risks pertain to higher than expected commodity prices and indirect tax increases, while downside risks relate to weaker than expected developments in economic activity.

The monetary analysis indicates that the underlying pace of monetary expansion has remained subdued, with somewhat higher growth rates in the past few months. The annual growth rate of M3 was 3.2% in March 2012, compared with 2.8% in February. Since January we have observed a strengthening in the deposit base of banks.

The annual growth rates of loans to non-financial corporations and loans to households (adjusted for loan sales and securitisation) stood at 0.5% and 1.7% respectively in March, both slightly lower than in February. The volume of MFI loans to non-financial corporations and households remained practically unchanged compared with the previous month.

Money and credit data up to March confirm a broad stabilisation of financial conditions and thereby, as intended by our measures, the avoidance of an abrupt and disorderly adjustment in the balance sheets of credit institutions. In this context, the April bank lending survey indicates that the net tightening of credit standards by euro area banks declined substantially in the first quarter of 2012 as compared with late 2011, for both loans to non-financial corporations and loans to households, also on account of improvements in funding conditions for banks. As also indicated in the bank lending survey, the demand for credit remained subdued in the first quarter of 2012, reflecting weak economic activity and the ongoing process of balance sheet adjustment in non-financial sectors. The full supportive impact of the Eurosystem’s non-standard measures will need time to unfold and to have a positive effect on the growth of loans when demand recovers. In this context, it should be noted that the second three-year longer-term refinancing operation was only settled on 1 March 2012.

Looking ahead, it is essential for banks to strengthen their resilience further, including by retaining earnings. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels.

To sum up, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.

It is of utmost importance to ensure fiscal sustainability and sustainable growth in the euro area. Most euro area countries made good progress in terms of fiscal consolidation in 2011. While the necessary comprehensive fiscal adjustment is weighing on near-term economic growth, its successful implementation will contribute to the sustainability of public finances and thereby to the lowering of sovereign risk premia. In an environment of enhanced confidence in fiscal balances, private sector activity should also be fostered, supporting private investment and medium-term growth.

At the same time, together with fiscal consolidation, growth and growth potential in the euro area need to be enhanced by decisive structural reforms. In this context, facilitating entrepreneurial activities, the start-up of new firms and job creation is crucial. Policies aimed at enhancing competition in product markets and increasing the wage and employment adjustment capacity of firms will foster innovation, promote job creation and boost longer-term growth prospects. Reforms in these areas are particularly important for countries which have suffered significant losses in cost competitiveness and need to stimulate productivity and improve trade performance.

In this context, let me make a few remarks on the adjustment process within the euro area. As we know from the experience of other large currency areas, regional divergences in economic developments are a normal feature. However, considerable imbalances have accumulated in the last decade in several euro area countries and they are now in the process of being corrected.

As concerns the monetary policy stance of the ECB, it has to be focused on the euro area. Our primary objective remains to maintain price stability over the medium term. This is the best contribution of monetary policy to fostering growth and job creation in the euro area.

Addressing divergences among individual euro area countries is the task of national governments. They must undertake determined policy actions to address major imbalances and vulnerabilities in the fiscal, financial and structural domains. We note that progress is being made in many countries, but several governments need to be more ambitious. Ensuring sound fiscal balances, financial stability and competitiveness in all euro area countries is in our common interest.

As I have spoken about many times previously I considers Mario Draghi’s statement about what is happening in Europe to be a view from some other planet. His opening statement appears to a boilerplate introduction and I do wonder if the following statement isn’t actually embossed on the ECBs stationary.

Available indicators for the first quarter remain consistent with a stabilisation in economic activity at a low level

You can find the latest PMI and employment data from Eurozone here along with information about Eurozone lending here. You can make your own assessment about the data, but I can find nothing in any of the latest information to show anything that I would define as a “stabilisation”. The latest unemployment figures from the Eurozone show that 170,000 people lost their jobs in March and the unemployment rate is the highest it has been in the area since the monetary union has formed. There are now more unemployed people in Europe than there are people in Australia. How anybody can keep a straight face while making these statements is beyond me. This is an economic tragedy, and the worse thing about it is that it has only just begun.

In the Q&A session, usually the most interesting, Mario Draghi went on to say that the “Fiscal compact” and the “Growth compact” are not mutually exclusive. Although Mr Draghi attempted an explanation I still have absolutely no idea what anyone actually means by a “Growth compact” so I can’t make a fair assessment of that statement. But given history, as I have said previously, I am still unconvinced that Europe’s financial leaders have simply re-branded the failed “expansionary fiscal contraction” to pretend they have a new plan.

Draghi also stated that he expected to see economic activity to recover gradually over the course of the year but latest signals from euro-area survey data highlight prevailing uncertainty. This just sounds like wishful thinking to me.

Having said all of that, Mr Draghi was making some sense on Europe’s future, even if he is very late to the party. Although he claimed that the “fiscal compact” was the right path to integration, which I disagree with, he stated that in order for the Union to move forward nations will have to give up sovereignty to some central authority. That is, the monetary union needs a fiscal and political union.

I am not sure if it was my own interpretation of his statement about this, but I felt he sounded quite desperate about these points. In fact, his answers to additional questions made it clear he is fighting against a political machine that he may not have too much faith in. He is absolutely correct on this aspect of the matter, but his words sounded more like a plea than a policy statement. Last night’s debacle over banking regulations proved once again that Europe is unable to overcome national politics to implement anything for the greater good of Europe as a whole, and this is just a repeat of what we have seen since the economic crisis began.

I have talked previously about the massive loss of political capital that has come about because of misguided economic policy, something Mr Draghi has been a very active part of. I expect the coming Greek and French elections to add to that loss and the fact that Mr Draghi refused to answer questions on these topics just added to my concerns.
With economic delusion at one end and political ineptitude at the other, it is becoming increasingly difficult to be optimistic about the Eurozone’s future, even though I dearly wish it could work.

Full press conference below.

Print Friendly, PDF & Email


  1. Bam_Man

    At a certain point we will see ALL the Central Banks go into “self-preservation” mode. I believe that Draghi and the ECB might be on the brink right now. Zero interest rates and unlimited money prnting to fund out-of-control government deficits are a sure-fire recipe for currency destruction. Draghi apparently recognizes this. Whether or not Bernanke does is still an open question. In any event “Reserve Currency Status” and eleven Carrier Battle Groups provides the Fed with the opportunity to perform more monetary shenanigans for longer than the Europeans.

    1. F. Beard

      Zero interest rates and unlimited money prnting to fund out-of-control government deficits are a sure-fire recipe for currency destruction. Bam_Man


      1. Bam_Man

        Chile – 1975
        Argentina – 1992
        Nicaragua – 1987
        Bolivia – 1985
        China – 1949
        Greece – 1944
        Yugoslavia – 1993
        Zimbabwe – 2008
        Hungary – 1946
        and of course, everyone’s poster-child for this,
        Germany – 1923

        1. F. Beard


          If a banking (credit creation) system might be stable without government money creation then might not government money creation be stable without a credit creation system?

          In any event, government should certainly be allowed to create government money. Whoever else?

          But the banks? Can they even exist without government privileges?

          1. F. Beard

            You don’t understand credit creation – “Loans create deposits”?

            Banks create money (“credit”) and the Federal Government creates money. Obviously the sum of those two is greater than either by itself.

            Banks don’t like the Federal Government creating money for anyone but themselves since it dilutes the value of their loans. Thus the banks (I pressume) insist that government deficits be funded with bonds.

            However, why shouldn’t the Federal Government decide it doesn’t like private banks diluting the value of its fiat? As a voter I sure don’t like the banks diluting the spending of my government.

        2. amanasleep

          This is an apples to oranges comparison. Governments printing fiat are expansionary wherever there is an artificial drop in demand (for instance in the current case where there was a drop in wealth valuations due to the burst of the housing bubble and the resulting overhang of private debt).

          In cases like this, we can see perverse outcomes of strong productive capacity but economic scarcity, with food stockpiled/destroyed while people go hungry, factories sitting idle while people go without useful items, people unemployed with plenty of needed labor for infrastructure improvements.

          Money printing only leads to hyperinflation when the quantity of money in circulation outstrips the real capacity of the economy to produce goods and services, and this is not the case in the major advanced economies. Quite the opposite.

          That implies that the US, with millions unemployed and factories shutting down, should in fact produce more money to stimulate demand and allocate these resources.

          All of your example economies were printing money for other purposes, chiefly for war costs or to line the pockets of kleptocratic government officials or their cronies, or as the result of fascist/communist brute force class-based wealth reallocation policies. None of this is going on in the US or even in Europe. If it were I would advocate regime change as the only option.

          Instead, money can be printed. So long as it is allocated to productive capacity, private deleveraging, or labor development and education, there will be no reason for it to even be inflationary, much less hyperinflationary. Normal inflation may occur once productive capacity is reached, but we are a long way off. In any event we have proven tools to fight inflation.

          BTW, In the case of the Weimar Republic the mass overprinting of fiat was to finance the crippling reparations of the Treaty of Versailles. Since 1/3 of Weimar GDP was financing zero production within Germany, hyperinflation was sure to result.

          1. Simon

            “All of your example economies were printing money for other purposes, chiefly for war costs or to line the pockets of kleptocratic government officials or their cronies, or as the result of fascist/communist brute force class-based wealth reallocation policies. None of this is going on in the US or even in Europe” ?????

            Are you kidding?

          2. amanasleep

            No. I am not kidding. If you disagree please provide an argument so that we can debate it.

          3. F. Beard

            None of this is going on in the US or even in Europe” ????? Simon

            Well, I think the difference is that the US and Europe mostly lend to crooks rather than just give them money which is a bit too obvious.

          4. amanasleep

            I do not dispute that the the FED is printing money and using it to deleverage the banks. As a matter of effectiveness and fairness, I disagree with these actions, and advocate that stimulus be targeted at the general population.

            However, the question here is whether such a move is inflationary or hyperinflationary. It clearly is not, and falls within the range of government fiat printing to assist in private deleveraging.

            This is clearly helping the economy stabilize, though in choosing to stabilize at the status quo ante of a system of bank driven debt creation, it is not optimal.

            Contrast to say, China in 1949, when the government was causing massive hyperinflation in Mao’s vainglorious attempt to finance world communism and military ambitions on the backs of a starving populace and an economy with little existing infrastructure or productive capacity. The result was hyperinflation, sure, but much worse than that, the most murderous artificial famine in history, which may have killed as many as 40 million people.

            To make any comparisons between this and modern G20 nations betrays an almost unfathomable ignorance.

          5. amanasleep

            Correction: I got my history a bit confused. The hyperinflation was caused by the Kuomingtang government funding WW2 and later, their side of the Chinese Civil War against the communists.

            The famine was later, during the Great Leap Forward.

          6. The Dork of Cork

            Except that in Europe the physical envoirment has been almost completly shaped by bank credit especially since 1987ish.
            The input costs into to farcical built envoirment are enormous.
            Remember that cars are just as much a product of consumer bank credit as houses.
            What little fiscal money was spent on infrastruture since then was items used to service these White elephants such as roads and the like.

            There is now a massive stock and flow problem….. Irish oil concumption is now back to 1998 levels when 1 million + cars were on the road….. but we have 1.8 million cars in the country.
            And it so happens our oil & energy Euro import bill was a record for Y2011 despite a truely massive drop of 1MTOE of consumption in one year !!
            Ireland is a small country 1MTOE is a hell of a lot.

            Y2008 : Total TPES : 16,642
            Y2011 :Total TPES : 14,174
            Its a mess.

          7. F. Beard

            Its a mess. Dork of Cork

            A universal bailout (ala Steve Keen) with new fiat would easily fix things. One should not assume that things built with credit are an illusion. They are not UNLESS we are so foolish as to mistake debt to counterfeiters as valid.

          8. wunsacon

            >> outstrips the real capacity of the economy to produce goods and services, and this is not the case in the major advanced economies. Quite the opposite.

            I disagree. You have to look in the right places for how the productive capacity is not keeping up with demand.

            Have you seen what passes for “food”? Have you seen how many people are morbidly obese from all the industry corner-cutting/cost-cutting to give people quantity over quality?

            Have you see the medical and student tuition increases?



            These price increases prove the growth of money (paper or electrons) has been outpacing the growth of productive capacity.

          9. wunsacon

            Industry has been “cheating” in its productivity improvements. The externalities show up in our air, food, and water and in slave labor abroad. And even that cheating has not kept down the price of commodities.

            Now, if you’re talking iPads. Sure. But, we can’t eat those.

  2. K Ackermann

    “The recovery is going ahead nicely. Our inflation expectations remain firmly anchored, mostly due to the… large… population… austerity brought about by the… firebombs.”

    (wild cheering)

    “Divisiveness brought about by Euro policies also remain subdued, but…” (wild cheers) “…but there remains downside risks in this area.

    (Long, wild cheering, punctuated by chants of a German anthem)

    “And I would like to conclude with this recipe I learned in German…

    Augenballgro?e Stucke vom Teig formen
    Im Staubzucker walzen und
    Sagt die Zauberworter
    Simsalbimbamba Saladu Saladim

    Auf ein gefettetes Backblech legen und
    Bei zweihundert Grad fur funfzehn Minuten backen und

    Bei zweihundert Grad fur funfzehn Minuten backen und
    Keine Eier”

    1. amanasleep

      Maynard James Keenan for President of the ECB!!!!!

      I always get him confused with John Maynard Keynes anyway. ; )

  3. Tim

    “Looking ahead, economic activity is expected to recover gradually over the course of the year. At the same time, as we said previously, the economic outlook continues to be subject to downside risks.”

    That’s a neat trick! you can get away with lying as long as you classify reality as a risk and not a certainty.

    Example: Expectations for my life expectancy are that I will live forever, however there are many risks associated with that outlook that make it a possibility that I might die.

    1. K Ackermann

      Just don’t let it interfere with your shopping. You must keep shopping.

  4. The Dork of Cork

    @F Beard
    A crediting of base money to a new CB checking account for each person is needed.
    But to solve the credit malinvestment waste needs to be taxed at a higher level.
    This will solve the stock and flow problem withen a few years.
    For example Irish people burn 1MTOE + a year of oil on home heating alone , this is pure waste and effects our balance of payments significantly when oil is $100.

    1. F. Beard

      Why not just pay households to insulate?

      That’s infrastructure, no?

      I am leery of taxation since it destroys money.

      1. The Dork of Cork

        @F Beard
        The rich might have most of the money but the middle and poor burn most of the energy.
        (If the rich actually spent their savings it would be worth less)
        Which is why they can spend so much on “The Scream” and some such……from a energy perspective it does not count for much – you just fly over to the auction house to make the bid.

        Insulation is not very cost effective after a certain level is reached especially in the Irish climate.
        Taking out the oil burner and replacing it with a wood /coal stove is far more cost effective.

        1. The Dork of Cork

          The overall aim is to reverse the stock and flow problem that bank credit created…. this will involve the issuing and destruction of money.

  5. Jim Haygood

    ‘In order for the Union to move forward nations will have to give up sovereignty to some central authority. That is, the monetary union needs a fiscal and political union.’

    Hey, never waste a valuable crisis! If there were ever an opening to launch a central fiscal authority, a hair-raising recession is the moment to do it, much as U.S. banksters opportunistically looted the Treasury during the 2008 meltdown.

    But it would help if the proposed European central authority actually had some anodyne ‘free money’ to bring to the table, rather than proposing to finance itself with more desperate borrowing, supplemented by pressing down upon the brow of labor a crown of thorns.

    The middle class must pay, until there is no more middle class.

  6. travis

    “At the same time, as we said previously, the economic outlook continues to be subject to downside risks.”

    Profound really, really profound.

  7. Maju

    People like Draghi should be in jail. But of course the fault is at least partly of all the people who vote the ones who vote those who vote Draghi (never mind the intermediaries: they’d vote Draghi directly as well if required).

    That’s a problem: you can still find people, too many, who believe in the system and all they ask for is for more and more cops. Until their turn come to be disposessed of everything, that is. But then it’s often too late.

Comments are closed.