Draghi’s
dilemma delivers depressing dilly
Mario
Draghi has an idea. Well he has a fragment of an idea. He has a fragment of an
idea he would like to turn into a policy initiative someplace. His idea is that countries should be careful
about transmitting distortions overseas from their own policies because they are
growing at different speeds. It has some basis in fact but also a vague
scatterbrain cast to it like a Saturday Night Live spoof of a real policy maker’s
speech. He must have been in an amazing state of denial when he thought up
those remarks…here they are:
“In a
globalized world, the global policy mix matters—and will likely matter more as
our economies become more integrated,” Mr. Draghi said. “The speed with which
monetary policy can achieve domestic goals inevitably becomes more
dependent on others.”
-- Mario Draghi
Draghi
rambled on because he did not want to say directly what he was directly
thinking. So he rambled on and tried not say what was really on his mind, that
was of course:
Please
don’t hurt me!
He was worried
about that villain of international monetary policy, Janet Yellen and her
monetary policy plan to hike rates in 2016…to do it as much as four times. Reverberations
from that would wrack the EMU economy. But of course a central banker can’t
single out a fellow banker so he spoke in these broad generalities, in vague
generalities. He tried to make it sound like something academic or rhetorical
maybe a theoretic construct. He tried
that but it came out sounding very confused and whiney.
That is because
it was illogical and confused.
Some
background…
The G-7 had
a go at trying to mutually manipulate exchange rates. They gave that up for the
notion that each country would run the best policies it could for its own
economy. But now that is not working either. The world trading system is broken
and so this is the sort of thing that will happen.
Now with the
ECB’s back against the wall and the Germans holding the key to the lock box of
fiscal policy Draghi is without options. He is doing QE and interest rates are
negative. He has even appealed for more efficiency. He is afraid that rate hikes
in the US could swamp him like a man in a small dingy as a freighter goes by.
Please make no wake. But the problem here is not with the potential wake maker.
It’s with the guy in the dingy who has no business being there.
The idea
that the US is at fault for wanting to hike rates seems preposterous: US inflation
is low but climbing and the unemployment rate is quite low. Yet, the fact that
the US is the one more at risk because Europe has launched a policy of negative
rates is, in fact, much truer but almost never voiced. Money is pouring into the US pushing rates down
at time that they might be better served going up. Why should the needs of the
European business cycle take precedence over the needs on the US business cycle
in the making of US policy?
Riddle me
that one bat man...or super Mario. Where does this idea come from? What is its
precedent?
Arguably
ECB policies have been much more distortive to global events than US policy.
Although with the dollar as a much more powerful reserve unit, and the
numeraire for commodity prices, its potential to spread its effects globally
takes on greater impact when the Fed moves. Higher U.S. rates would send a
deflationary chill across the rest of the world and, in this environment that
could be enough to make a difference. I can understand Draghi’s fear. But does
he really want to influence the conduct of US policy?
First of
all the idea of a US policy move is fanciful –still only hypothetical- while
the EMU negative interest rate policy is a reality. Their reality is affecting
the US economic situation and the US policy-trade-offs. And so what is the US
supposed to do? It is in a different position in its business cycle than
Europe. Should policy stand still and let bad stuff happen in the US? Germany
is actually a member of the EMU and what is it doing with its own substantial
fiscal flexibility? How much is it helping its own cause? (i.e. zero).
It is not clear
to me at all what Draghi expects or why except this...
Don’t hurt
me, Janet. Please…
Draghi did
not say anything profound. He offered no resolution to any problem. In fact he
seems to have made something up… Why does Europe’s policy goal become more
dependent on overseas events necessarily? There is a business cycle conflict
and we have had countries with business cycles out of sync before. One thing
EMU/EU could do is use fiscal policy. But the Germans have put that off limits
and because of that the US needs to alter its money policy to fit into Europe’s
policy pickle? Frankly I don’t get it. I
don’t see it. And I think it is an example of how fouled up Europe has become. At
the European Summit members were gaming Scotland about its EU ambitions to
aggravate the U.K. But instead they aggravated Spain that has its own separatist
regions to be concerned about and quashed the notion of making an offer to
Scotland for its own reasons. These bureaucratic machinations are unbecoming of
a major currency bloc. Its leadership is showing their pettiness. The EU should
be focused on what it can do to help the ECB instead wasting energy trying to make
the UK miserable over Brexit.
Europe
seems to see its problems as exacerbated by what everyone else does. The UK’s
Brexit decision has Europeans hopping mad. US monetary policy is causing them
problems. Of course, their own inaction in the Middle East allowed ISIS and the
migrant problem to get out of hand. Europe wants to blame Greece for being a
migrant entry point, but what can Greece do?
At some
point Europe has to face the music, take its share of the blame, and choose
among the policy options it has. Taking policy options off the table is not a
good idea. But the Germans and much of the rest of EMU have different ideas
about policy. Germany is engaged in a show of force to make the rest of Europe
pay for past fiscal transgressions. Europe is being disciplined by Germany and
Draghi wants the US to take off some of the pressure. Meanwhile, European bureaucrats
are playing stupid tricks on one another as Italian banks are reeling from a post
Brexit stock sell-off. Here again Europe wants the Italians to follow-the EU
protocols on bank bailouts. Renzi has all but given them a Bronx cheer on the
notion of letting shareholders step up to feel the pain, that - THAT – is not
going to happen in Italy. But what will happen is still unclear.
Isn’t that interesting? None
of it bodes well for the future. Markets may be settling down in the Brexit as
a reality era. But there are still lots of hurdles to go over and it seems few
adults to do it. The market turbulence is unlikely to be over soon with leadership
like this.
