Article / 15 September 2014 at 2:44 GMT

Draghi: A modern day Janus or simply wrong-headed

Managing Partner / Spotlight Group
United Kingdom
  • Draghi: Too often actions have been too late and lacked aggression
  • public spending to reinvigorate the Eurozone is incredible given debt levels
  • Allow central banks, not governments to acquire asset-backed securities

By Stephen Pope

In the religion of ancient Rome, Janus is the god of beginnings and transitions. He presided over the beginning and ending of conflict - ie the outbreak of war and the onset of peace. He is invariably depicted as having two faces. He is seen as looking to the future and to the past.

Given that Mario Draghi is Italian and was actually born in Rome, it is not unrealistic to consider him a modern day Janus. Having served as chairman of the Financial Stability Board, governor of the Banca d'Italia (Bank of Italy) and now president of the European Central Bank, he has a long and established track record of reviewing the past so as to shape the future.


Mario Draghi: After the success of Outright Monetary Transactions, he may think he
can direct markets as he wishes. Photo: Thinkstock

No one could fairly argue that given the limitations of the ECB mandate, Mario Draghi has not done as much as possible to alleviate the strains inside the Eurozone. However, if he has a weakness, it is that too frequently action taken has been implemented too late, and has lacked aggression. It maybe that given the stunning success of the untried and untested program of Outright Monetary Transactions, the ECB president has been led to believe that he really can direct the markets whenever he wishes.

Source:, Spotlight Ideas

If one reviews the minutes of this year’s ECB press conferences one will see that while Draghi has of course discussed the economic outlook of the Eurozone, he has rightly urged the politicians of Europe to do more. He knows that his ECB cannot, on its own, rescue the single currency economy. That will only be achieved if aggressive, accommodative and extraordinary monetary policy is matched by much needed structural reform.

On September 11 at a speech in Milan, Draghi delivered a speech in English so that his words would reach as wide an audience as possible. He used his speech to raise the pressure on laggard nations that have so far shown little appetite for improving the conditions for entrepreneurs and established organisations to do business. They fail to grasp that lasting wealth comes from the private sector, not the benevolent state.

The World Bank Group has ranked 189 nations on a range of business metrics. When it comes to the “Ease of Doing Business” the top four economies of the Eurozone are ranked as:

• Germany (#21) France (#38) Spain (#52) and Italy (#65). In contrast the US is ranked as (#4) and the UK (#10).  In passing judgement commercial environment in the Eurozone, President Draghi said: “…Such barriers to entry limit competition and employment…”

A change of tack?

It is curious, however, to note that when Eurozone average debt to GDP stands at 92.60 percent he has suggested that there was room for governments to use public spending to reinvigorate the stalled Eurozone economy. This is quite incredible given the level of debt the four leading economies carry.

• Debt: GDP (percent) Eurozone 92.60, Germany 78.4, France 91.8, Spain 93.9, Italy 132.6.
These comments appear to be in direct contrast to usual mantra from the ECB that Eurozone members focus on reducing budget deficits and debt.

I will always be happy to agree with the policy that government stimulus should focus on the supply side and seek to lower taxes and implement reductions in “ineffective” government expenditure. If it was agreed that there were targets for fiscal deficits, when a nation falls foul of that condition they should named and shamed, if after a short grace period no corrective action is undertaken. 

Last Thursday it was notable that France was not mentioned on the matter of the budget deficit even though Finance Minister Michel Sapin said France's deficit would be around 4.3 percent of GDP in 2015 and would not dip under the 3 percent target for EU countries until 2017.

Sapin wrote in French daily Le Monde that the EU must adapt its deficit rules in light of the bloc's weaker-than-expected economy. It is amazing why the rules have to be altered as against altering the lack of reform in France. As is usual with a socialist approach, it is always someone else’s fault. Someone else has to pay.

It appears as if the ECB President is starting to be swayed by the anti-austerity brigade that seeks to take aim at Germany which runs a balanced government budget. He suggested that those countries that are able to spend more should do so.

Indeed he went further to propose that the collective Eurozone fiscal profile be examined. Please let’s not re-open the “Blue and Red Bond” debate again. As he said: “…It may be useful to have a discussion on the overall fiscal stance of the euro area…with the view to raising public investment where there is fiscal space to do so. …”

Government intervention in banking

Draghi expressed concern on the lack of lending to small and medium sized business. He proposed that governments should consider offering guarantees to encourage lending to small businesses. He has also urged national governments to acquire bank-issued asset-backed securities (ABSs).

Please correct me if I am wrong on this point but across the European Union (not just the Eurozone) start-up loans are available from the national governments. The problem in obtaining finance has come when an expansion for a small or medium sized enterprise has been requested. Similarly, one has to look again at the World Bank analysis as to how easy or difficult it is to do business in any given nation. The Eurozone does not stand out as a strong business case.

My understanding was that it was the purpose of the Targeted Long-Term Refinancing Operations coupled with the negative deposit rate that would catalyse the commercial banks to make these loans on a commercial basis with realistic credit conditions and lowered hurdle rates of return given the cheap cost of capital.

I always questioned the efficacy of the TLTRO when the asset quality review and the third bank stress test was still underway. However, in this past week it has emerged that the ECB is to meet in the coming weeks with executives of 120 Eurozone banks to give them a sneak preview as to how they have fared in the stress test. It strikes me that the ECB have realised that the TLTRO will be stillborn unless bank board’s know where they stand as to needing to make more capital provision. It simply sounds like policy on the hoof.

If the commercial banks are still reluctant to lend, why not allow the national central banks, which are effectively branches of the ECB, to act as a lending conduit? That has to be better than having national governments creating yet more layers of bureaucracy and red tape.

On September 4, amid much fanfare, the ECB signalled that it was ready to start acquiring ABSs so as to pump liquidity into the Eurozone economy. I have shown in recent articles for this site that the market for such securities is relatively small:

• The European ABS market has a size of EUR 1.4 trillion - 14.39% of the Eurozone GDP.
• The US ABS market has a size of USD 10.3 trillion - 61.3 percent of the GDP.

In effect, the program of acquiring European ABSs is not going to be the silver bullet to stave off the risk of regional deflation. I think that Draghi is currently reluctant to enter the realm of quantitative easing by purchasing sovereign debt, so he is seeking all methods that could boost the size of the European ABS market. But again - why involve national governments?

If the ECB is to acquire ABSs anyway, why not just let the ECB itself or the national central banks snap up the new issue ABS debt of banks within their borders. Keep the governments out of the equation. If governments start acquiring bank-issued ABSs, it (i) requires move government spending and (ii) drives the market higher so increasing the cost of ABSs to the ECB and reduces the efficacy of Draghi’s first version of asset purchases.

-- Edited by Adam Courtenay

Stephen Pope is managing partner at Spotlight Ideas


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