The markets gave a high-five to an ECB statement last week by Mario Draghi “The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time.“
I fail to see why this was news even though the ECB has never issued such a pledge before. Did anyone really think the ECB was going to hike rates soon?
For further discussion, please see Communication Only “Tool” Left
A more realistic message came from German Central Bank president Jens Weidmann who stated the “ECB Cannot Solve Euro Zone Crisis”
AIX-EN-PROVENCE, France (Reuters) – The European Central Bank cannot solve the euro zone crisis, Bundesbank chief Jens Weidmann told economists on Sunday, pressing the bloc’s governments to get their economies in shape and tighten their fiscal rules.
Weidmann addressed an economists’ conference in Aix-en-Provence, southern France, only three days after the ECB broke with precedent by declaring that it intended to keep interest rates at record lows for an extended period and may yet cut further.
“Monetary policy has already done a lot to absorb the economic consequences of the crisis, but it cannot solve the crisis,” Weidmann said in his speech.
“This is the consensus of the Governing Council. The crisis has laid bare structural shortcomings. As such, they require structural solutions.”
While he does not see sufficient support in the euro zone for governments to give up sovereignty on fiscal matters to forge a fiscal union to prevent such crises in the future, Weidmann pressed them to stiffen Europe’s fiscal rules.
“To fully unleash the common currency’s potential, efforts are needed on two fronts: structural reforms as well as the abolition of implicit guarantees for banks and sovereigns (government bonds),” Weidmann said.
“In addition to stronger rules, we need to make sure that in a system of national control and national responsibility, sovereign default is possible without bringing down the financial system. Only then will we really do away with the implicit guarantee for sovereigns.”
The Bundesbank chief also called for euro zone governments to sever what he describes as the “excessively close links” between banks and sovereign governments, saying that European banks hold too many of their own governments’ bonds.
“This is because banks do not have to hold any capital against their government debt, as the risk-weight assigned to sovereign bonds is zero.
Six Key Points
- The ECB cannot solve the crisis
- The problems are structural
- There is little support for governments to give up sovereignty on fiscal matters to forge a fiscal union
- There should be no guarantee on banks and sovereign bonds
- European banks hold too many sovereign bonds
- Sovereign bonds should not have a risk-weight of zero
Unstated Message “No One Else Can Either”
The above six points are obvious. But what Weidmann did not say (but should have) is the euro itself is a big structural problem.
And please note point number three. Weidmann was not just speaking for Germany. Rather he was speaking of the divide between Northern Europe and Southern Europe.
Yet another divide exists between France and Germany regarding productivity issues, labor reforms, taxes, government spending, and the role of the ECB.
And just imagine the impact if all of a sudden banks had to assign a reasonable risk-weight on sovereign bonds. Banks holding them would suddenly (and correctly) be viewed as capital impaired. The obvious implication is banks are capital impaired right now, but impairment is hidden via of absurd zero-risk weightings on bonds.
So don’t expect anything to come of points 4-6. And don’t expect countries to give up sovereignty. And don’t expect France to do anything about work rule reform, its pension problems, its massive 56% of GDP public sector, or its horrendous agricultural subsidies (imposed on the rest of the EU as well).
In short, the problem remains unsolvable until the first country has enough common sense to say “to hell with the euro”.
Mike “Mish” Shedlock