Questions we should ask Mario Draghi
- Germany objects to everything so what can be done about it?
- How will the ECB manage higher capital requirements of the banks?
- Is there any future for the euro area in its current form?
The European Central Bank’s president Mario Draghi will be speaking in Helsinki, Finland on Thursday. Bloomberg wrote that this is his “final opportunity to signal his intentions for policy next week after a series of public comments seeming to prepare the ground for fresh stimulus”.
I will be attending the event as a member of the press and have been thinking long and hard about what I should ask him. The trick is asking him a question that he is both willing and able to answer. Draghi will not say anything that is confidential, could undermine current and future policies, anger certain countries (read: Germany) or lead to panic in the financial markets.
It is thus not worth asking the questions that really matter because they will not be answered. In the following I present a couple of questions that matter but would be futile to ask. If you have any good ideas of what to ask him, leave a comment below.
When will the banks be fixed and how?
Why even the stressed scenario in the comprehensive assessment did not include deflation or restructurings of sovereign debt?
Why did the ECB allow discretion on a national level to accept things such as goodwill and tax-deferred assets as bank capital?
The Peterson Institute for International Economics calculated that if banks had to adhere to the fully loaded CET1 capital ratio (to become mandatory in 2017), the banks would be required to add EUR 126.2 billion of new capital. European banks have raised approximately 50 billion in new capital in 2014 and sold off their assets in preparation for the comprehensive assessment. How will the ECB ensure that the banks will be willing and able to raise capital during the next two years to meet the tighter requirements?
As banks will probably continue raising capital and selling off their assets, how will the ECB plan to compensate the expected decrease in bank lending?
Why are you keen on inflation?
Higher headline inflation in 2011 made the ECB raise rates twice. The higher inflation was caused by higher energy and food prices and thus it was cost push inflation, and not demand pull inflation. When inflation fell, it was originally explained away as a temporary fall due to lower energy and food prices. Why is the ECB being inconsistent on its stated inflation goal? Doesn't such an asymmetrical approach guarantee that the ECB will consistently fail to reach its policy goals?
There are several problems associated with a relatively low inflation target of 2% – the most important being that when facing a serious financial crisis, there is not much room to lower rates. What thinking or economic research backs the 2% target, or is it just a number chosen arbitrarily, just like the Maastricht criteria were?
The financial market consensus worries, given the history of the ECB’s decision-making, Germany’s oversized influence and its opposition to easier monetary policy, that the ECB would tighten monetary policy at the first sign of inflation picking up. The easiest way to deal with this would be through forward guidance: stating explicitly that the ECB would allow the inflation to overshoot during the eventual recovery phase and that any cost-push inflation would be ignored. Why this has not been done? Are the investors correct and will the future ECB remain a tight central bank, even under an existential threat of becoming obsolete after a breakup?
Do your stated goals and presented policies fit?
If the diagnosis is that Europe suffers from lack of demand, low inflation and debt overhang, how will the ECB’s balance sheet expansion by purchases of government debt help, especially when interest rates are already low and legal debt and deficit limits are in place?
If the balance sheet size is not a policy goal in itself but rather a tool, it becomes uncertain if asset purchases would help in meeting the ECB’s goal. If lack of demand is the real problem, why isn’t the ECB presenting more direct criticism towards EU’s official austerity line and the German rhetoric? Division of duties is not an acceptable answer, since ECB’s actions are widely debated in politics and courts, and at the end of the day both fiscal and monetary policy are directly linked.
What would be an optimal asset purchase mix to increase the aggregate demand?
What are you going to do with Germany?
It is widely known that Germany has resisted the interest rate cuts and almost all unconventional policy measures. Can the ECB be a credible conductor of monetary policy if, in reality, all the key decisions are made by Berlin and the Bundesbank?
Should push come to shove, in what situations could the Bundesbank argue that articles 10.3 and 32 of the ECB statutes allow the use of capital-weighted voting procedures – which would give Germany 26% of the vote – and require a two-thirds majority for a proposal to pass a vote and thus guarantee that Germany can veto anything it wants as long as it gets one or two countries on its side?
If the leaders of EU institutions are willing to oust Italian or Greek prime ministers, is it not reasonable to say that those very same leaders also try to accommodate the political needs of the core countries, namely Germany's Christian Democratic Union and its leader Angela Merkel?
What actions are taken to improve the reaction time and the credibility of the ECB, including but not being restricted to limiting Germany’s influence over the central bank's decision-making?
If Germany has a hard time being in a currency union, would it not be in everyone’s interests to let Germany go, thus allowing a more optimal policy mix for the rest of the euro area?
When will you accept Russia is here to stay?
The Ukrainian crisis and sanctions against Russia seem not to be short-lived. At what point will the ECB accept that the crisis is not a temporary event, and will in all plausible scenarios have a prolonged negative effect on the growth outlook? When the ECB accepts this, will it also act appropriately? Isn't economic weakness something that promotes instability and encourages adversaries?
Why so many secrets?
Why the ECB has declined to disclose how Greece used derivatives to hide its debt?
Why were the so-called Trichet-letters to Ireland not made public before the Irish Times published them? Would it not have made sense to publish such communication so that other countries would have had an additional incentive to get their finances in order? How much else is there that the public or the governments do not know about?
Do you see any viable future for this construct?
Internal devaluation (lower wages, unemployment, lack of demand) seem to be necessary in many euro area countries to suppress internal imbalances of the euro area. This is unsustainable because it causes deflation and debt-deflation, not to mention political unsustainability and external imbalances of the euro area. How can we escape this catch-22?
After all that you have seen, would you still consider the European Monetary Union a good idea that was implemented well? If not, would you say that the euro was a mistake?
In your opinion, is there a viable future for the European Monetary Union unless sovereign debts are mutualized and there are much larger fiscal transfers between the member states? Is such a union realistic, and if not, what will be done instead?
Membership in a monetary union without a backing federal union is economically risky to a single country. Would it not be prudent to prepare a two-way system where countries that want closer integration will proceed, and those countries that do not want further integration are allowed to exit the monetary union?
If given free hands and not being bound by existing treaties, what would you think would be the three things that the ECB would do now?
Why haven’t the changes required to do those three things already been made, and do you think they will ever be made?
Thank you for your time, President Draghi.
-- Edited by Kevin McIndoe
Juhani Huopainen is a blogger and a macro analyst at More Liver’s Daily.