Friday, November 4, 2011

One Step Back, One Step Forward

The European Central Bank has institutional schizophrenia (excerpt):

ECB Unexpectedly Cuts Rate as Draghi Rules Out Debt Backstop

Nov. 3 (Bloomberg) -- The European Central Bank unexpectedly cut interest rates at Mario Draghi’s first meeting in charge even as the new president signaled no plans to backstop the region’s most vulnerable nations as the escalating debt crisis threatens to splinter the euro region.

“What makes you think that becoming the lender of last resort for governments is what you need to keep the euro region together?” Draghi asked reporters in Frankfurt today. “That is not really in the remit of the ECB. The remit of the ECB is maintaining price stability in the medium term.”

ECB officials unanimously lowered the benchmark interest rate by 25 basis points to 1.25 percent, confounding 51 of 55 economists in a Bloomberg News survey. Only four predicted a quarter-point move and two expected a half-point reduction. Italian bond yields fell after the rate cut and the euro extended declines, dropping as much as 0.8 percent to $1.3657.

European leaders last night raised the prospect of the 17- member area breaking apart, with France and Germany saying they would treat Greece’s surprise referendum on a second bailout as a vote on its euro membership. With the region’s economic slowdown deepening and investors growing increasingly concerned, the ECB was under pressure to reverse this year’s two rate increases...

...The ECB needs to “go into the market and say ‘We have a wall of money here and no matter how much speculation there is, we’re going to keep buying Italian bonds or any other euro bonds that are threatened’,” Irish Finance Minister Michael Noonan told Dublin-based RTE Radio yesterday.

Draghi rebuffed those calls, sticking to the line adopted by his predecessor, Jean-Claude Trichet. The ECB’s bond purchase program is “temporary, it’s limited in the amount and it’s justified on the basis of restoring the functioning of monetary policy transmission channels,” he said.

By sticking by its official mandate of price stability, Draghi and the rest of the cumbersome ECB board are disclaiming any responsibility for high and rising unemployment, deepening economic malaise, and social breakdown in Europe. I suppose staunch adherence to a principle should be applauded – but sometimes one needs to rise above that when there are larger considerations at hand. The basis of the price stability mandate is that it fosters long term growth, but I fail to see how being complicit in the economic and financial destruction of the European periphery brings that about.

With European governments hamstrung by debt, only the ECB, with its unlimited ability to issue Euros, has the muscle to restore stability to Europe’s financial system. The tragedy is that the ECB, guardians of the Euro, might through their inaction be the agent of the Euro’s destruction. Isn’t that ironic?

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