Friday, February 21, 2014

Goldilocks & The European Bears Have Breakfast with the ECB

I attended a breakfast this morning with a former ECB official (I realize this is the second post in a row where I've talked about an unnamed person. It's a little annoying, because I realize I'm not exactly Bob Woodward, but I'm trying my best to respect Chatham House rules). I'll keep it vague - he was quite highly placed, but left around the time Draghi took over.

1) German constitutional court decision was on net positive, despite its tone, because it didn't explicitly forbid OMT.
2) Broadly optimistic on the future of the Eurozone:
a) Jean Monnet recognized that the European vision would only be forged through crisis, and so far, the Eurozone had responded whenever its collective back was against the wall.
b) Institutions like the banking union were coming together.
c) Things are starting to improve even in the periphery.
3) However, he was very cautious on what he deemed the limits of monetary policy. He was very concerned that appropriate conditionality be met before programmes like OMT could be launched, and would prefer to see the ECB try to ease monetary conditions by improving credit transmission (possibly even directly buying loans & ABS).
4) There was some resignation that Japan-ification could happen in the Eurozone because of "structural factors" (don't get me started).

While I thoroughly respect the experience he has, I don't quite buy the story that the Eurozone is entering a Goldilocks period. I don't want to be overly wedded to the bearish story: if European equity and credit prices improve, this is an implicit monetary loosening (which could then start a virtuous circle if combined with other indicators). But it seems to me that a modicum of skepticism is warranted when others start to project linear increases in economic and corporate earnings growth, particularly when the need for aggressive policy action has waned. To be continued, no doubt.

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