“Look at my hand, look directly at my hand…”
Three problems the great illusionist can’t make disappear
One of the more engaging features of European Central Bank boss Mario Draghi is that his spin isn’t aimed entirely at the gullible. It isn’t so much a lie as an interpretation. The interpretation on offer isn’t ‘Americans never went to the Moon’ mad either: more that he is, you know, in control of things. Nobody is in control of things at the moment, but Signor Draghi is at least competent. Not for him any grand overstatement a la Barroso. “We have made a good agreement” was his comment on yesterday’s Brussels mirage. Spin, of course, but not risible spin.
Draghi’s problem is at its core very simple: he has far too many audiences to satisfy, and far too little money with which to meet their expectations. In order to deal with this, he seems to me to have two guiding principles: do one thing at a time well; and make it all look like progress. (There must be something about this in the Goldman Sachs training programme, because Mario Monti follows the exact same strategy).
For example, Problem 1 – market fear of buying ClubMed bonds: the ECB boss knows only too well that he could already paper the walls of his Frankfurt base with worthless junk bonds. He also realised early on that bond-buying produces private bank dependence. But in creating an aura of success around his ‘liquidity programme’, Mario has now calmly announced that the bond-buying programme “is no longer necessary”. And there are enough trusting traders and bankers out there who will believe such tosh.
The reality is that he has given 500 eurobanks a billion euros each (on average) that nobody else would’ve given them. The idea that they have pushed this cash out into the economy is nonsense: the credit crunch is every bit as bad as it was six weeks ago, and the EU economy is at a standstill outside Germany. But the banks feel a little calmer – and for Draghi, the economy is Problem 4 further down the can-strewn road. His achievement is that very poor Eurobond demand is now seen by many as an ex-problem. As the two things aren’t really connected, this was an amazing card trick.
Like all accomplished illusionists, Mario Draghi gives good distraction. Eurobond demand is a problem that will return at all stops along the railroad to Grand Canyon Gap, but for now that money can now be focused on Problem 2 – making sure no major banks fall over in the context of Greek default. The next issue of his liquidity scam is at the end of this month. The distraction by then will be an unravelling Greek survival deal. Private bank demand for ECB money will still be very high; but probably, amid all the Athens/Brussels shuttle diplomacy, not many people will notice.
Not long after that, Problem 3 – Greek amputation – will solve itself. Some of the commentariat (Stiglitz, Wolf, Evans-Pritchard) will meanwhile have been pointing out the continuing huge eurobank demand for money, and round about then the two Marios will start banging the eurogrowth drum: bailout will be rebranded ‘investment’, and this in turn (I suspect both men hope) will bring in Sino-Japanese funds – assuming Klaus Regler hasn’t snatched defeat from the jaws of victory by then. For good measure, I wouldn’t be surprised if some eurobank lending figures are released at the same time – with much fanfare – to reveal a percentage increase in bank lending to business. Now we are dealing with Problem 4, and Problem 3 is also seen as an ex-problem. M&M will start quietly syphoning ECB and ESFS/ESM monies into Italian and Spanish growth.
Sleight of hand is a wonderful thing, but there are three problems Europe’s Central Conjuror can’t magic away. The first of these is Portugal.
This will present problems of an entirely different kind to Greece. Having positioned Greece as the first and last one-off unique special deal, the room for Eurozone manoeuvre will be severely limited. Two amputations in a year will make it look as if ClubMed will soon be paraplegic. Once again, there will be seen to be no final guarantor. Here, Draghi must hope that Merkel wins her race towards FiskalUnion. I have my doubts about that. In fact, I have my doubts about her political future, but that can wait for another day.
The second problem is the French election. Much as Wolfie Schauble would dearly love to tell the Elysees to postpone it, it’s going to happen, and almost certainly Sarkozy will lose. Nico’s two insurmountable problems are first, he’s been useless; and second, Marine Le Pen may well split the Right vote badly. I think if Angela Merkel turns up to help Sarko, that really will seal his fate; but again, somehow I suspect she won’t.
So unless something dramatically helpful to Sarkozy’s cause happens in the next six weeks, a Socialist President will be in place. His first act, very probably, will be to blow up the FiskalUnion train. Keep your eyes peeled for the dramatically helpful event….but at the same time, don’t rule out the power of fiscal blackmail from Berlin and Frankfurt to change Francois Hollande’s mind.
The third problem is the Greek General Election. The psephology isn’t looking good. While one or two BBC scaremongers are drivelling on about the Extreme Right there, the Hard Left has almost ten times as much support. My continuing belief is that the Brussels deal will be in smithereens by then, and social unrest will be a serious problem. The outside world will look at events, and finally realise that its precious neocon austerity has handed power to the Hard Left. The expectation will be for Portugal to go the same way.
Other things – Iran, China, Putin’s failing career, lack of growth investment in time for Italy and Spain, and Cameron’s decision to back Spain and Italy in a ‘Growth Troika’ – could be influences in one form or another. But as a magician, proving you have no tricks up your sleeve is not just a useful distraction: it also proves you haven’t got any hidden weapons either.
Signor Draghi is going to lose this war. But he will have won several battles in a game manner. Whatever one thinks his aims might be, he is making a far better fist of his job than any of the other players. I shrink from offering applause; but he certainly has my respect.