Money Supply

Mario Draghi flew direct from Wednesday night’s Brussels summit to Rome, where he gave a lecture in honour of Federico Caffè, a celebrated Keynesian economist under whom he studied.

His main message was the need for eurozone politicians to come up with a vision for the union’s future. But he also admitted that his university thesis was sceptical about the idea of a single currency area.

“The title was ‘towards the start of a single currency’ and the thesis was actually quite critical,” Mr Draghi recalled, according to Bloomberg. “See how things change in life,” he added.  Welcome transparency? Or a chink of self-doubt?

Did the Bundesbank last week try to stop life-saving emergency liquidity assistance for Greece’s banks? That would be a reasonable interpretation of noises from Germany’s central bank — and suggests a dangerous game is being played out in Frankfurt.

The Financial Times reported on Tuesday how at least some Greece banks are being kept alive by about €100bn in “emergency liquidity assistance”, a facility meant to be used only by banks in the direst of need. The massive demand followed the ECB’s decision to exclude four Greek banks from its regular liquidity providing operations because of uncertainty over their future financial strength.

As such, ELA is propping up the Greek banking system, allowing it to remain a member of the eurozone. But the word in Frankfurt is that the Bundesbank was not pleased. It thinks Greece should have pressed ahead much faster with the recapitalisation of its banking system, using €25bn in funds already made available by the European Financial Stability Facility. Too much of a burden is falling onto unelected central bankers, it fears.

Might the Bundesbank have gone so far as to vote against approving the Greek ELA — even if it would have tipped Greece into financial catastrophe? The Bundesbank is not saying, but the tone of recent comments by Jens Weidmann, president, suggests he would if Greek ELA were to rise further. “It’s true, I would not think it right if the eurosystem (the network of eurozone central banks) now increased again its risks vis-a-vis Greece,” he warned in a German Sunday newspaper.

As Mr Weidmann noted pointedly in the same interview, a two-thirds majority is required on the ECB’s governing council to block approval of ELA. That makes it harder for the Bundesbank to gather the necessary degree of support, and might have dissuaded it from pressing the matter last week. But Athens has been served notice.

Luc Coene, Belgium’s central bank governor, was outspoken on Greece in his interview with the Financial Times. He also revealed a little more on the use of emergency liquidity assistance across the eurozone.

ELA, provided by national central banks rather than the ECB, is meant to be used only in exceptional circumstances — and requires special approval by the ECB’s governing council. We know its use has been heavy in Greece and Ireland. But as I have noted before, there is still a considerably amount of unexplained ELA about.

Tension surrounding the European Central Bank’s monetary policy meeting in Barcelona, Spain, on Thursday will be higher than might have been imagined even a few weeks ago.

Eurozone economic woes have deteriorated noticeably, and Spanish police are on guard for possibly aggressive demonstrations. Here are some ideas on how ECB governing council members may be thinking:

Use of emergency liquidity assistance by eurozone banks could be considerably higher than previously thought. That is the conclusion I draw from a change today in European Central Bank reporting procedures.

If I am right, it could be that a bank (or several banks) somewhere in the eurozone is (are), in effect, being bailed out by national authorities. Fingers will inevitably point to Spain.

ELA is only given in the direst of circumstances, when a bank is no longer eligible to take part in regular liquidity operations, and has to be specially approved by the ECB’s 23-strong governing council in Frankfurt.

A spot of domestic trouble for the European Central Bank: its staff in Frankfurt are demanding protection for their pensions — against inflation.

Under current arrangements, payments for former ECB staff in retirement increase on average less than consumer prices, according to Carlos Bowles, chairman of the ECB staff committee.

An obvious objection is that if ECB staff were protected against inflation, they would have less incentive to do their jobs properly. As part of their campaign to increase the flexibility of eurozone economies, ECB policymakers have frequently urged the ending of automatic inflation-linked wage increases.

But Mr Bowles says: ”The problem with the [current ECB pension] system is that if we do a good job, and inflation is 2 per cent, we still lose….The ECB is one institution that can control inflation. So why do they refuse to protect ECB staff against the inflation risk?”

The ECB had no comment on Monday.

Just because big announcements are unlikely does not mean this week’s interest rate setting meeting will be comfortable for the European Central Bank. As a service to Money Supply readers, here is a guide to what will be worrying the ECB’s 23 governing council members when they gather in Frankfurt on Wednesday.

Eurozone stability is not quite as secure as it seemed a month ago, just after the second of the ECB’s three year longer-term refinancing operations, which brought the total amount injected into the eurozone financial system to more than €1trn. Spain has challenged the effectiveness of the region’s new “fiscal compact” — seen by Mario Draghi, ECB president, as essential to restoring the eurozone’s credibility.

Germany’s conservative “awkward squad” — willing to criticise publicly the European Central Bank — has a new member. Jürgen Stark, who quit the ECB’s executive board last year, has voiced alarm at the inflationary consequences of its actions to save the eurozone and warned the global financial system is “on drugs”.

The former Bundesbank vice-president’s comments are given expansive treatment in Handelsblatt, the business newspaper — they are spread over six tabloid pages. Two points struck me as novel.

Mario Draghi is prepared to take risks — at least with his communication strategy.

Germany’s Bild today a large photograph of the European Central Bank president laughing enthusiastically on being presented with an original 1871 Prussian spiked helmet by the newspaper’s editorial staff.  It was obviously meant in jest. But was it demeaning for a supposedly serious central banker?

The picture refers back to Bild’s original endorsement of Mr Draghi for the ECB presidency last year, a move which signalled Germans were prepared to accept an Italian in charge of their currency.