Europe gets a new central bank boss from today and it looks to be a baptism of fire for the new incumbent. Mario Draghi takes over from Jean-Claude Trichet on the day it becomes apparent that the latest attempt to produce a comprehensive plan to save Europe had a half life of 24 hours. Draghi is going to get hit up by every Euro-sovereign, bank and central banker from around the world to do something about Europe’s crisis and the big question will obviously be “is he a printer?”
The fact that Sarkozy had to fly all the way to China to try and convince another nation’s leader to him some Euros speaks volumes of the ideals Draghi is replacing , and as Zarathrusta pointed out this morning the whole idea that China would purchase EFSF bonds en masse makes little sense to either side.
Although there have been a few reports floating around that Draghi is more aligned with the likes of Geithner, on balance it would seem that he is a consensus builder not a radical “lead from the front” type of guy. I certainly haven’t seen anything to convince me that the ECB is about to shoot off in new direction and it seems most European economists agree:
Those hoping for a change of course from a Draghi-run ECB are likely to be disappointed, said Michael Schubert, an economist at Commerzbank AG in Frankfurt. The Italian has been on the bank’s Governing Council since 2006 and the role of chairman is limited to finding a consensus among its 22 other members rather than striking out alone.
“Draghi can’t do much different from Trichet,” said Schubert. “His influence is rather limited.”
Trichet has said he expects the revamped European rescue fund to take over the role of bond buying from the ECB. While the European Financial Stability Facility is now securing that ability and governments are working to increase its spending capacity, some economists say the ECB will have to remain in markets.
“The role which the ECB will or will not play remains crucial,” said Holger Schmieding, chief economist at Joh Gossler Berenberg & Co in London. “Without ECB support, the chances of this deal putting an end to the euro crisis now are probably below 50 percent
On Thursday Draghi will chair his first ECB meeting to decide on European interest rates. The result could be very telling as to the direction the new leader will take the central bank. Eurozone inflation is stuck around 3.0% which is outside the target band set by the bank, however, there is obviously pressure to cut rates given Europe’s troubles. The OECD obviously wants Draghi to cut, and from their words go a bit further:
Advanced economies are looking at two years of weak growth and high unemployment and the outlook is likely to worsen unless Europe reins in its sovereign-debt crisis, the Organization for Economic Cooperation and Development said Monday, as it slashed next year’s growth prediction for the U.S. and the euro zone.
In a brief outlook published three days ahead of a meeting of the Group of 20 industrial and developing nations in Cannes, France, the OECD urged the European Central Bank to cut rates to restore growth in the world’s largest economic zone, and recommended that other central banks keep rates on hold and provide liquidity to the financial system to ease market tensions.
If Draghi does cut rates this week in the face of the inflation rate then he will be all but admitting that Trichet got it wrong in July, however failure to do so will signal to the markets that nothing has changed. The decision will be interesting to say the least.
The other news of note out of Europe overnight is that Greece is to hold a referendum on the latest round of austerity measures:
Prime Minister George Papandreou announced on Monday night that his Socialist government would hold a national referendum on a new debt agreement for Greece hammered out with the country’s foreign creditors last week. He said that the decision on whether to adopt the deal, which includes fresh financial assistance for the country but also imposes unpopular austerity measures, belonged to the Greek people. Addressing party lawmakers, Mr. Papandreou said he had faith in Greeks making the right decision in the referendum. “Let us allow the people to have the last word, let them decide on the country’s fate,” he said, describing the vote ahead as “an act of patriotism.”
There doesn’t seem to be a date set as yet and I, for one, couldn’t call this vote. It is obvious that the Greeks are struggling with austerity and recent newspaper polls have shown that over 50% of people polled think that the package is negative for their country. But it is a big leap from that to voting down a package that would probably lead to the immediate expulsion from the Eurozone to be left fending for yourself in some unknown economic future after a disorderly exit. I actually see this vote more of a wave of the white flag from Papandreou who has reached the end of his political rope and requires a new mandate from the Greek people to go any further.
I’ll obviously be watching Greece closely in the lead up to the vote.