CLSA - Greed & Fear : Dec8
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Deepak Vaishnav
Dec 10, 2011, 12:10:55 AM12/10/11
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The Draghi character test
Stockholm
The short-term direction of world markets has now become a bet on the true character of the new ECB President Mario Draghi. As discussed here last week (GREED & fear – Action time?, 1
December 2011), the key issue for investors ahead of this latest EU summit is whether sufficient consensus can be achieved on the path to fiscal integration to give the ECB an excuse
to start monetising debt. For such a move would clearly be as bullish for equities as it likely would be bearish for the euro.
The reason why the character of Draghi has become all important is that it is clear that the compromise agreed by Nicolas Sarkozy and Angela Merkel in Paris earlier this week does not
establish the groundwork for a credible fiscal union. For this reason a conservative ECB boss would not view it as a reason to pursue debt monetisation. But if the ECB boss is a politician,
looking for an excuse to monetise, then the central bank’s reaction to the new agreement will be different. Note last week that Draghi said more could be done from a monetary policy
perspective if a more resolute approach to fiscal integration was agreed. To be precise, Draghi told the European Parliament in Brussels on 1 December that “a new fiscal compact” is
definitely the most important element to start restoring credibility, and that “other elements might follow, but the sequencing matters. And it is first and foremost important to get a
commonly shared fiscal compact right”.
Stockholm
The short-term direction of world markets has now become a bet on the true character of the new ECB President Mario Draghi. As discussed here last week (GREED & fear – Action time?, 1
December 2011), the key issue for investors ahead of this latest EU summit is whether sufficient consensus can be achieved on the path to fiscal integration to give the ECB an excuse
to start monetising debt. For such a move would clearly be as bullish for equities as it likely would be bearish for the euro.
The reason why the character of Draghi has become all important is that it is clear that the compromise agreed by Nicolas Sarkozy and Angela Merkel in Paris earlier this week does not
establish the groundwork for a credible fiscal union. For this reason a conservative ECB boss would not view it as a reason to pursue debt monetisation. But if the ECB boss is a politician,
looking for an excuse to monetise, then the central bank’s reaction to the new agreement will be different. Note last week that Draghi said more could be done from a monetary policy
perspective if a more resolute approach to fiscal integration was agreed. To be precise, Draghi told the European Parliament in Brussels on 1 December that “a new fiscal compact” is
definitely the most important element to start restoring credibility, and that “other elements might follow, but the sequencing matters. And it is first and foremost important to get a
commonly shared fiscal compact right”.
This leads on to the point why the latest Franco-German compromise is not really credible assuming, as is likely, the same sort of deal is agreed at the coming summit to be held on 9
December. The main reason why is that the new framework is not so different from the Eurozone’s old “Stability and Growth Pact” which proved such a failure in maintaining fiscal
discipline. The reason why it is not so different is because national governments will still have the final say on budgets. The reason this is the case is because Frau Merkel has seemingly
backed off from her earlier demands that the budget rules be policed by a supranational body like the European Commission or the European Court of Justice. In this respect, the clue as to
Germany’s more conciliatory approach is that Frau Merkel travelled to Paris to meet an obviously delighted Sarkozy for their Monday meeting ahead of Friday’s summit.
December. The main reason why is that the new framework is not so different from the Eurozone’s old “Stability and Growth Pact” which proved such a failure in maintaining fiscal
discipline. The reason why it is not so different is because national governments will still have the final say on budgets. The reason this is the case is because Frau Merkel has seemingly
backed off from her earlier demands that the budget rules be policed by a supranational body like the European Commission or the European Court of Justice. In this respect, the clue as to
Germany’s more conciliatory approach is that Frau Merkel travelled to Paris to meet an obviously delighted Sarkozy for their Monday meeting ahead of Friday’s summit.
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