Bill Jamieson Cracking the code

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

Cracking the code

As pronouncements from the ECB become increasingly unfathomable, the eurozone slips closer towards recession.

WANTED: Blindfolded expert with Jesuitical mindset to de-code deeply encrypted material and extract complex meaning. Fluency in Braille required. Grasp of economics a bonus but not essential.

Such are the qualities now required to make sense of the pronouncements of the European Central Bank. Top economists rake over its statements but are little the wiser on resulting action while in the real world to which the ECB seems blind, the eurozone slides further towards recession.

They would have gained little enlightenment from the Bank’s latest monthly meeting. The press conference given by ECB president Mario Draghi was woefully symptomatic of so much that is wrong with this institution: a descent into baffling ambiguity and tortuous gobbledygook from which it is difficult to derive any coherent meaning, still less any serious solution to the eurozone’s problems.

UK companies doing business in the eurozone or seeking to boost exports into the region need little introduction as to ‘the problems’. Growth in the 27-member currency zone is lamentable. There are one or two flickers of recovery – Spain for example, and even Greece – but these are barely sufficient to sustain any hope of a corner being turned.

The European Commission has cut its growth forecast for the eurozone for this year to just 0.8 per cent. The previous estimate was 1.2 per cent.

Germany’s economy started the year strongly, but has been slowing recently amid problems in France and Italy and subdued investment elsewhere. Some now fear the eurozone’s economic powerhouse will contract in the final months of the year, pushing into technical recession.

These fears were heightened by figures showing that industrial production in Germany slumped by 3.1 per cent in August. Economists had been hoping for a rebound to two per cent growth in September. Instead it managed just 1.4 per cent.

For Italy the EU Commission has slashed its GDP growth forecast, by 1.2 percentage points – to minus 0.4 per cent – and halved its 2015 forecast to 0.6 per cent.

Its forecasts for the Netherlands have been lowered across the board, Portugal is forecast to overshoot its 2015 fiscal target and for France it has queried claims of €3.6–€3.7 billion of extra 2015 budgetary savings owing to lack of details on the measures proposed. However, for Spain it forecasts GDP growth of 1.7 per cent next year, though it notes consumer confidence fell back in October.

This was the background against which Mario Draghi sought to explain the latest thinking of the ECB Governing Council. Clarity was not to the fore.

For at least a year the world has been waiting for Europe’s central bank to take action similar to the US and UK: a big monetary boost. It has tried negative interest rates. It has tried cheap loans. But it has so far resisted following the path of full-blown quantitative easing.

Instead there was yet more time-marking with talk of a reinforced balance sheet target, with specific references to ‘the dimensions it had at the beginning of 2012’, and an explicit reference to March 2012 when the size was around €3tn (£2.35 trillion). This implied a balance sheet expansion target of €1tn. He added the ECB had begun buying covered bonds as part of earlier-announced stimulus attempts, and would soon be buying assetbacked securities. “One must,” declared Mr Draghi, “look at the correlation between balance sheet size and inflation expectations.”

The press conference given by ECB president Mario Draghi was woefully symptomatic of so much that is wrong with this institution

Unconventional measures

So now that’s clear, what is the Bank actually doing? Joining the dots of Draghi’s remarks, he said the ECB was committed to further measures if needed and that ECB staff had been tasked with preparing for this. “The governing council,” he said, “will closely monitor and continuously assess the appropriateness of its monetary policy stance.

“Should it become necessary to further address risks of too prolonged a period of low inflation, the governing council is unanimous in its commitment to using additional unconventional instruments within its mandate. The governing council has tasked ECB staff… with ensuring the timely preparation of further measures to be implemented, if needed.”

And what exactly would determine whether further measures were needed – as if the current anaemic performance of the eurozone was not already sufficient? An evident contingency was a further lurch to deflation.

Little wonder that a Reuters story highlighted some national central bankers’ frustration with Draghi’s communication style and added that between seven and ten council members of the ECB had been against quantitative easing.

Draghi downplayed these disagreements but indicated that “the risks are on the downside. We know we have to be prepared.” This, noted a banking analyst who could barely conceal his excitement, “was a noticeable departure from the script.”

Consensus conclusion (for now): the tone was judged to be more dovish than previously, even if no action was taken, and nearterm QE is considered more likely, though whether this will come in December or further delayed into early 2015 was impossible to decipher. But perhaps that’s just the result the ECB wanted. n