Economic Outlook: Policy with an asterisk

By ANTHONY HALL, United Press International  |  Aug. 21, 2012 at 9:22 AM
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The European Central Bank is still correcting a misstatement made by its president and is beginning to blame the media for the mistake.

Stock markets surged in Europe and the United States when bank President Mario Draghi uttered his infamous -- it's beginning to sound notorious -- phrase in a speech that the bank would do "whatever it takes to preserve the euro." That was 3 1/2 weeks ago. Then, on Aug. 3, without apology, the ECB policy makers concluded their monthly meeting without announcing any policy change.

In Draghi's presentation to the media that day there was a subtle hint that Draghi had been taken to task for his overstatement. Or, maybe that's too much reading into things.

Regardless, Monday the ECB explicitly reacted to an article in the German magazine Der Spiegel that said the bank was considering capping yield rates for some eurozone countries. This would require it to buy bonds, presumably from Spain and Italy, where yields are dangerously high, and perhaps Greece and Portugal, as well.

Such conjecture is now moot. In a statement, the bank said, "It is absolutely misleading to report on decisions which have not yet been taken."

Stocks in Europe caught a brief updraft Monday from the article in Der Speigel, The New York Times noted.

"As far as recent statements by government officials are concerned, it is also wrong to speculate on the shape of future ECB interventions. Monetary policy is independent and undertaken strictly within the ECB mandate," the central bank said.

It may be small potatoes at this point but that word "independent" is grating to some degree. "Independent from the media," might be more accurate, as the Times also notes the ECB doesn't want to alienate the Bundesbank, Germany's central bank, which is opposed to the ECB embarking on a bond-buying intervention.

The entire argument falls back on the strategy supported by Germany that struggling countries in Europe first get their fiscal houses in order, or at least take steps in that direction, to qualify for international assistance.

Only with a sound financial plan, this strategy states, will investors have 10 years worth of confidence in any particular government and it takes at least that much confidence for a government to do better than selling short-term two-, three- or five-year bonds.

That's a fairly simple way of looking at bond market investing, but so be it.

But hear Germany out. From a German perspective, bond-buying just may be enabling. It wouldn't buy time, it would buy dangerous time. It would buy powder-keg time, more or less like putting off work on the brakes on a car. It would buy that kind of time, the kind of time you don't really want.

The same dance is being played out on another stage. Greece is looking for a two-year extension on some of the terms of its international aid. Germany is strongly hinting an extension is not in the works. "It is not responsible to throw money into a bottomless pit," Finance Minister Wolfgang Schauble said Saturday.

Is this the final word on generosity toward Greece? German Chancellor Angela Merkel has a long track record of strong statements on preserving the euro, which some believe means preserving Greece's membership in the currency partnership.

Maybe that's, "preserving the euro" with an asterisk. And the asterisk says, "without Greece."

In international markets Tuesday, the Nikkei 225 index in Japan lost 0.16 percent, while the Shanghai composite index in China rose 0.54 percent. The Hang Seng index in Hong Kong was flat, falling 0.02 percent, while the Sensex in India added 1.1 percent.

The S&P/ASX 200 in Australia rose 0.44 percent.

In midday trading in Europe, the FTSE 100 index in Britain added 0.35 percent, while the DAX 30 in Germany gained 0.61 percent. The CAC 40 in France added 0.72 percent, while the Stoxx Europe 600 added 0.25 percent.

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