This time the European Central Bank blinked first. A week ago, Berlin caved into ECB pressure and agreed that private sector involvement in a fresh Greek bail-out would be voluntary. On Friday, it was the ECB that backed down in the face of government demands.
Nicolas Sarkozy, France’s president, successfully argued that Italy’s Mario Draghi’s appointment as the ECB’s new head would mean too many Italians on its six-man executive board – and not enough Frenchmen. He threatened to hold up Mr Draghi’s appointment if Lorenzo Bini Smaghi, the other Italian on the board, did not agree to go. Today, Mr Bini Smaghi gave assurances that he indeed expects to have gone by the end of the year.
In many eurozone quarters, this will be seen as a worrying development.
Day two of the European Union summit is already underway, and among the issues we will be watching closely is the nomination of Mario Draghi to become head of the European Central Bank, which even at this late date appears not entirely a done deal.
Imagine you were a central bank with a legal duty to promote financial stability. In addition to that onerous task, things haven’t gone very well for you in the financial stability department in recent years. You consider some changes to formal structures and to communication. At the time of publication of a periodic financial stability document, do you:
A) Make a big show about transparency and publish the report at a specific moment, simultaneously holding a flagship press conference with the head of the central bank?
B) Make a big show about transparency, publish the report at a specific moment, allow journalists a controlled preview of the document to aide understanding, then hold a flagship press conference with the head of the central bank and those in change of financial stability?
C) Make much less of a show about transparency, allow a rather uncontrolled preview of the document under embargo, hold a background unattributable press briefing of the report with those in charge of financial stability and set a time under which the embargo is lifted and the document is published?
D) Do a combination of the above options?
E) Do something else?
The one question to earn a wry smile from Fed chairman Ben Bernanke today was on whether the Fed will adopt an explicit inflation target.
His answer was one of his most informative. In essence, he said that: (a) he wants one; (b) it’s not imminent; (c) there’s no need for a change in the law; and (d) there would have to be consultation and communication with both Congress and the public.
By continuing to provide eurozone banks with as much liquidity as they want, the European Central Bank is financing the massive current account deficits of crisis-hit countries such as Greece. Its actions have been akin to issuing “eurobonds” – without politicians having realised. Credit markets in other eurozone countries have been squeezed as a result.
Hans Werner Sinn, president of the Munich-based Ifo economic institute, has become a thorn in the side of the ECB by making such arguments. In Frankfurt today he spent more than two hours explaining his case to journalists – a clear sign that he is not going to give up anytime soon.
All eyes were on the Bank of England minutes of the June Monetary Policy Committee to see whether the replacement of Andrew Sentance with Ben Broadbent would change the balance on the Committee. It did.
Mr Broadbent voted with the majority not to tighten monetary policy, removing one hawkish voice. The Committee is now broadly split 7-2 against tighter monetary policy. Mr Broadbent’s vote was the first dovish tilt apparent in the minutes. Compared with the harsh Mr Sentance, who voted vehemently for rate rises every month most recently seeking a 0.5 percentage point rise, Mr Broadbent is very cuddly indeed.
The second dovish tilt came in paragraph 25.
What will happen to Italy’s Lorenzo Bini Smaghi, the European Central Bank executive board member?
Last week, Nicolas Sarkozy, France’s president, and Silvio Berlusconi, Italy’s prime minister, called for him to resign. They have found no fault with Mr Bini Smaghi – except his nationality. Once Mario Draghi, Italy’s central bank governor, takes over from Jean-Claude Trichet, ECB president, there will be two Italians on the ECB’s six-man executive board. That, argued Mr Sarkzoy, would “not be very European” (especially as there would no longer be a French member of the board).
Unsurprisingly, Mr Bini Smaghi, urged on by colleagues at the ECB, has stood firm. For the fiercely-independent ECB this is a matter of great principle; it cannot be seen to be swaying to political interference and Mr Bini Smaghi has stayed put. As such, the ECB has found itself in yet another standoff with eurozone governments.
The question often arises of which monetary policy rule the Fed uses in its analysis (I’m going to avoid the much more involved question of which monetary policy rule it should use).
In their latest commentary, the economics team at MF Global note:
“We realize Fed officials do not mechanically follow a Taylor Rule in setting monetary policy, and expectations for growth are being pared a little, but, based on the original Taylor Rule and adjusting for stimulus from balance sheet expansion, we calculate that the last set of Fed projections was consistent with about a 3% funds rate at the end of 2012.”
Nout Wellink, the Dutch central bank governor, was in rumbustious form in an Financial Times interview this morning. For him, the European Central Bank was at the end of the road in terms of the help it could offer Greece (even if it agrees on fresh reform efforts). Instead, eurozone governments should double the size of Europe’s rescue funds in an attempt to convince financial markets of their commitment to shoring-up the eurozone.
I also asked him about the race to head the International Monetary Fund. Mr Wellink had a reason to be aggrieved.