I’ll say it again…

May 7, 2013


European Central Bank chief Mario Draghi felt it necessary yesterday to depart from the script at a ceremony awarding an honorary degree to reiterate his message from last Thursday – that the ECB could cut interest rates again and was looking at pushing the deposit rate which it charges banks for holding their funds overnight into negative territory in an attempt to get them to lend again.

Nothing new in the message obviously but the fact he felt the need to repeat it at a forum at which nobody would expect him to could be telling. Draghi has form here. It was at a pre-Olympics conference in London last July that he delivered his “whatever it takes” to save the euro pledge that fundamentally shifted the terms of the currency bloc’s debt crisis.

That the recession-plagued euro zone economy could do with a shot in the arm is beyond question though Draghi insisted countries must not let up on their debt-cutting. Very different tone from the prime ministers of Italy and Spain who demanded action to cut unemployment though Italy’s Enrico Letta said growth could be boosted without increasing debt.

Top event today is a meeting of the finance ministers and central bank chiefs of Germany and France in Berlin with the two countries at odds over a number of euro zone themes. The old saw is that when the Franco-German motor breaks down, Europe breaks down. Now, Germany is obviously so much more powerful that may no longer hold true, but Berlin is near the top of the list of capitals wanting a strong French voice in the EU, particularly if they can agree.

As well as differing on the pace of austerity versus the need to restore growth, the two leading EU nations are at odds over plans for a bloc-wide banking union – an attempt to prevent future financial crises. As Draghi said last week, this crisis won’t be over until a banking union is established and it should be done as a matter of urgency. Germany, saying it might require treaty change, is not listening and has clearly gone cool on the idea given the potential liabilities it could be left with. This is supposed to be sorted at an EU summit in June. They are a very long way off. None of that is spooking the markets, however, which continue to push euro zone borrowing costs down.

Speaking about the upcoming summit, Italian PM Letta is worth quoting in full: If, he said, it “results in a bureaucratic, routine, formal conclusion, with a great abstract plan that needs two years to be implemented … we risk creating a climate in Europe in which the winning parties will be anti-European.”

There is a dizzying array of other euro zone players to monitor besides the Franco-German meeting. Angela Merkel is talking to business types, European Commission President Jose Manuel Barroso is at a Brussels debate on the euro zone’s future and European Council President Herman Van Rompuy is in Helsinki for talks with Finland’s premier, who generally lines up with Germany. Jeroen Dijssebloem, head of the Eurogroup of euro zone finance ministers (apologies for the EU titles splurge) will get a grilling from a European parliarmanetary committee on the Cyprus bailout and IMF chief Christine Lagarde and ECB bigwig Joerg Asmussen are also out and about.

Portugal has mandated banks to launch a benchmark 10-year bond and it may come today. In January, Lisbon successfully sold its first bond since mid-2011 and ECB policymakers have said that if and when a country in a bailout programme has demonstrated it can raise money from the market on a number of occasions, it could qualify for the central bank’s as yet unused bond-buying programme. It’s certainly a good time to raise money. Troubled Slovenia did so with no problems last week. It has now turned its thoughts to privatizations to avoid the need for a bailout.

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