Recap 2014-11-4: Intrigue in Frankfurt


The ECB’s dirty laundry continues to gets another airing. This one came from the German side. The Reuters article had several choice bits and some repetition of previous reports, but the most economically interesting parts include:

  • The bankers are particularly angered that Draghi effectively set a target for increasing the ECB’s balance sheet immediately after the policy-making governing council explicitly agreed not to make any figure public, the sources said.
  • "We now know that the further we go, it will be without Jens," said a central banker who has tried to build bridges between them. "He’s clearly not going to change his position."
  • One of the few national chiefs whom Draghi takes into his confidence is Bank of France governor Christian Noyer, an elder statesman who was on the Governing Council when the euro was launched in 1999, one ECB source said. That did not stop Noyer voting against Draghi’s plan to buy asset-backed securities and covered bonds, which Noyer thought ill-prepared and technically flawed, another source said.
  • At times, Draghi has appeared to pay little attention to national governors’ comments in the monthly rate-setting meeting after chief economist Peter Praet and board member Benoit Coeure report on the economic situation and financial markets.
  • At least seven and possibly as many as 10 of the 24 council members are against U.S.-style quantitative easing – creating money to buy euro zone government bonds – if inflation falls further below the ECB target of just below 2 percent, the sources said.
  • Opponents include executive board members Yves Mersch and Sabine Lautenschlaeger as well as governors from Germany, the Netherlands, Luxembourg, Estonia, Latvia and possibly Slovakia, Slovenia and even Austria

This is a clearly orchestrated leak by the anti-QE side, timed to impact the upcoming ECB meeting, possibly to head off the risk that additional stimulus is conducted over the heads of the prior dissenters. Given the details revealed, it makes sense to start releasing minutes and votes of the meetings soon, both so that there is an objective record, as well as to reduce the risk and impact that unauthorized leaks are used to influence monetary policy in the future.

I think there should be a lot of sympathy for Draghi’s predicament. Keeping 24 people and 24 national central banks informed, and to get a consensus to do something, is just incredibly unwieldy. There have been various studies done on the optimal number of people in decision making groups, and those studies all suggest a single digit number. At the zero bound, facing deflation, and with a strong need for unorthodox policies, convincing so many people (who tend to be steeped in orthodoxy) to do something unorthodox is exceedingly hard, if not impossible. Even in the US, there are still a number of well known economics and finance people who insist that QE is horrible for the US – without question! And almost none of them are even willing to acknowledge the fact that they may be wrong.

With respect to the direction of policy, it’s hard to imagine Draghi pushing for further controversial easing on Thursday. But it’s also hard to imagine that Draghi is going to accept this challenge to his presidency – by a minority of governors – sitting down. In addition, these leaks name names… which suggest that either the governors named were indifferent to being named, (unlikely) or were themselves doing the naming. Otherwise, it would be a pretty serious ethics breach. Regardless, the battle lines have been drawn – it’s hard to imagine that the informal ECB working dinner tomorrow will be cordial. What this article doesn’t reveal are the swing voters, and how they’re leaning. Of particular interest is Vitor Constancio, the Vice-President, and the only member of the 6-person Executive Board who was not named in the article. But given that he is from Portugal, and the fact that he is Draghi’s VP, and the fact that prior controversial easing have been passed to the General Council for voting and passed, it’s highly likely that he is a Draghi sympathizer. This means that Draghi has 4 of the 6 votes on the Executive Board, and probably a plurality of votes on the General Council. It seems that the Germans recognize that Draghi has the votes to do what he really wants, and are trying to head off additional ECB action anyway they can – including ways that break protocol.

The Q&A at the ECB meeting on Thursday should be quite interesting.


  • RBA kept policy unchanged, but they re-inserted a sentence noting that the AUD was strong


  • Tue: NZ Employment, China HSBC PMI, Kuroda Speaks, US Mid-term Elections
  • Wed: EU PMI, UK PMI, EU Retail Sales, US ADP, ISM Non-Mfg, DOE Oil Inventories, AU Employment, Japan PMI
  • Thu: BoE, ECB, CanadaBuilding Permits, US Jobless Claims, Unit Labor Costs
  • Fri: German Trade Balance, US Employment, Canada Employment, Yellen Speaks

4 thoughts on “Recap 2014-11-4: Intrigue in Frankfurt

  1. I’ve commented along these lines before, but I think if Draghi were to try to do a Kuroda, and push through a highly controversial policy by 5 votes to 4 or similar, it would be a truly Pyhrric victory, inasmuch as it would do far more damage at an institutional level than any benefit we would see from the policies in question.

    The whole idea of doing an end run around the Germans seems like wishful thinking to me, like the ending to a Hollywood movie; the Ark of the QEvanent is opened, and the Germans are all melted by its flames. Debtors all throw off their chains, and sunshine and unicorns are once again seen in Europa…

    1. …not to suggest that our host holds these views, but this is the mood music I’m picking up from perusing the wilder shores of the periphetariat.

      To flesh out my view of why an end run around ‘the Germans’ is infeasible (or at least inadvisable), EMU is not a stand-alone entity; it exists within the broader context of the European project. A profound schism within EMU would have ramifications far beyond the monetary union. Of course, allowing EMU to crash and burn would have profound ramifications as well, but we’re not looking at that quite yet. Unfortunately, as far as Europe goes, we need a little crisis to chivvy things along; in that sense, ‘whatever it takes’ has worked too well. Now, when Mario calls Rome or Paris, reminding them of the reform quid pro quo, he gets fobbed off: “Mario, we’re trying, but reform is hard, man…call us in two years, and we’ll give you an update.’

      Draghi alluded to this the other day, when he mentioned that reforms had not kept pace with monetary policy. For this reason, I doubt Draghi himself is in favour of sovereign QE. The idea is pretty much dead, unless we get a new wave of crisis. Doesn’t stop banks and funds (stuffed to the gills with peripheral debt) pushing the idea incessantly.

  2. Great points. Just interesting to me why the Germans are playing this card now. Are they worried about incremental further easing? Or did they just happen to get to a consensus w/ the other anti-QEers now?

  3. No way to know; maybe we’ve all been watching too much House of Cards? Perhaps it’s not a grand plot, and this is just the sort of briefing against that occurs when things get particularly fractious?

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