In memory of Dr. Andreas Höfert

Words, words, words reloaded

Almost one year ago, on 19 August 2011, I wrote here about an eagerly awaited summit between German Chancellor Angela Merkel and then-French President Nicolas Sarkozy. Hamlet’s famous exclamation, “Words, words, words,” gave the piece its title. I concluded by saying: “The apparent closing of ranks between the two European heavyweights France and Germany might be reassuring in the short run. In the long run just talking the talk is not enough anymore.”

Unfortunately, a year and many summits later, the proverbial “kicking the can down the road” remains the name of the game in Europe. The latest disappointment came from the European Central Bank. Market participants are still puzzled over why ECB President Mario Draghi, addressing investors in London on the eve of the Olympic Games, forcefully claimed that “The ECB is ready to do whatever it takes to preserve the euro, and believe me, it will be enough” – and only a week later failed to deliver at the official ECB meeting.

Sure, he started his press conference with strong statements about “high yields in the European periphery that are unacceptable” and how those risk premiums need to be addressed. He went on by saying that the ECB might “take non-standard measures in case markets become disorderly.” Finally, he also discussed the current concerns of investors about the seniority of their bond holdings in case the ECB intervenes in the bond market.

All this was at first music to market participants’ ears – but once the fireworks were over, Mr. Draghi didn’t become more concrete. Quite the contrary, he even expressed surprise that journalists (not to mention market participants) wanted more than just words. After an initial rally, the European markets went down substantially and the euro took a tumble against the dollar.

This disappointment is easy to understand. Political time is much longer than market time, hence we need a safety net to bridge the gap. Only the European Central Bank can provide such a safety net. However, despite the affirmation that the “euro is irreversible” and that the ECB will do whatever it takes to keep it this way, Draghi wasn’t really convincing. To take just one example, what does he mean when he talks about disorderly markets: Spanish and Italian interest rates over 6%, over 7% or over 10%?

Moreover, we are now two-and-a-half years into the euro crisis, and words from European officials have all but lost their credibility. You only need to remember the magnificent euphemism of former ECB President Jean-Claude Trichet, who claimed in a June 2011 speech: “The euro is a solid and credible currency, trusted by our fellow citizens, investors and savers. There is no ‘crisis of the euro.’”

The truth is – as we have stressed here many times – there can be no happy ending to the euro crisis. Whatever the ultimate outcome of the crisis turns out to be, either the disintegration of the euro or full fiscal integration with shared European debts and probably higher inflation, it will be costly for both the “weak” and the “strong” countries. The rest is silence.