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ECB: Clearing the way for an Italian hawk?

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Stephanie Flanders | 16:58 UK time, Thursday, 5 May 2011

Jean-Claude Trichet was more dove-ish than expected in his press conference today after the European Central Bank's (ECB) latest meeting. The city was surprised, but Mario Draghi may come to be grateful.

You might not have taken Trichet for a dove, listening to his stern words about the "upside" risks to inflation. But in the strange world of ECB-watching these days, it's not what is said, but the precise words that are used to say it.

To give a sense where this has got to, let me quote part of a note from Barclays Wealth, explaining why the ECB president's opening statement suggested that a June rate rise was not on the cards after all. (This is no dig to the author - I've received plenty of similar emails since Mr Trichet sat down.)

"The ECB's introductory statement did not include the phrase "strong vigilance". It did refer to conditions being "still accommodative". We had expected "very" accommodative to be used (as opposed to plain "accommodative" last time), and were not (on balance) expecting use of the phrase "strong vigilance".

In our view, the use of "still" here is much the same as re-insertion of "very" would have been: it implies that the expression can be revised to "vigilance" at the next meeting on 10 June. We continue therefore to look for a 25bp rate increase at the 7 July policy meeting, with this signalled at the 9 June meeting by using the word "vigilance"."

So, I hope that's clear.

Before the meeting, people expected the ECB to raise interest rates at least twice more in 2011, with one rate rise in June and the other perhaps in September. After today, the city doesn't expect another rise before July, with the next one perhaps not arriving until the winter.

If that's the correct reading - and it probably is, given that the ECB has previously been eager to participate in this game of "spot the missing adjective" - then two conclusions follow.

The first is that the ECB is taking seriously recent signs that the Eurozone recovery is losing momentum, particularly outside Germany. And it's not been unduly spooked by the jump in eurozone inflation to 2.8% in April, the highest in two and a half years. Trichet's pointed comments about the dollar suggests a concern for the rising Euro as well. Lest we forget, the eurozone - particularly the periphery - is relying on an export-led recovery as well.

The second point - more speculative - is that the delay in the second rate rise might prove helpful to his likely successor.

It now seems all but certain that the distinguished Italian technocrat, Mario Draghi, will take over from Mr Trichet in November. What could be better, if you are the first Italian to stand as the guardian of European price stability, than to begin your time in office by raising interest rates?

It's a frivolous point, perhaps. Not to mention highly speculative. But there's a serious-ish point underneath.

At a time when every rate rise makes the countries on the periphery wince (and every rise in inflation makes German housewives curse the loss of their beloved D-mark), there was plenty of nervousness about the possibility of a German taking the helm at the ECB. Especially a well known hawk such as Axel Weber, who was the front-runner until he surprised everyone earlier in the year by announcing he would stand down.

But think about it. Precisely because of his background and reputation, Axel Weber would have come in needing to prove he would put Europe first and Germany second. The pressure on Draghi will be exactly the opposiite.

If you're sitting in Spain and Portugal, you might well wonder whether you would have been better off with a German in charge, trying to show off his inner Italian - than an Italian desperate to prove he's German underneath.


  • Comment number 1.

    SF wrote "than an Italian desperate to prove he's German underneath.".
    The last Italian who tried that, died trying as well as backing the wrong side. I hope history does not repeat itself for his sake.

  • Comment number 2.

    Will the Finns prove to be the ice on the road when loans to Portugal finalised?
    Perhaps Weber is being prescient and planning to lead a Northern EU when all this blows over/up?

  • Comment number 3.

    That they are unable to use simple,clear, unequivocal and unambiguous language that does not require huge sophistry to understand probably illustrates that they are part of the problem rather than part of the solution. How they enjoy their games ! Nero fiddles, Rome burns , nothing changes until disaster befalls.

  • Comment number 4.

    Blogs just aint what they used to be....

  • Comment number 5.

    Interesting. Still doesn't convince me Trichet is dove-ish, we ony need to remember the damage he inflicted at last month's meeting, see the analysis on my own blog on this:

    Since then, the data that has been coming out from the eurozone and internationally confirms they moved too early last month, hence todays seemingly dove-ish remarks.

    With the stress tests next month likely to show serious fragility among European banks next month in light of looming restructuring of Greek, Irish and Portuguese debt any further rise in 2011 could prove suicidal for the eurozone. But the ECB can always hide behind its mandate, ignore financial instability and the collapsing economies of the periphery, and continue to worry instead about certain German housewives. If so, Draghi's term of office could well prove a lot more turbulent than Trichet's and will certainly test his inner German, if indeed there is one, to his limits.

  • Comment number 6.

    'Lest we forget, the eurozone - particularly the periphery - is relying on an export-led recovery ....'

    With the world and his wife wanting an export led recovery it begs the question of who will be doing the importing. Lest we forget, the UK exports - or should that be exported - more to Portugal than China in the very recent past.

  • Comment number 7.

    Shows how weak the Euro economies are. Relief for those consumers who just cannot bear to stop buying and carry on borrowing - just like us in the UK.

  • Comment number 8.

    ECB carries on as before.

    Krugman blog, July 23, 2010, 'Jean-Claude And The Invisibles':

    "And Jean-Claude Trichet will clearly be among the main protagonists.

    His column in today’s FT is almost a caricature of the austerity genre. Trichet’s explanation of why we must fear the invisible bond vigilantes would be funny if it didn’t have such serious consequences:

    'In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors. My understanding is that an overwhelming majority of industrial countries are now in those uncharted waters, where confidence is potentially at stake. Consolidation is a must in such circumstances.'

    Ask yourself, what evidence does he present in that passage? None, because the reality is that bond markets don’t look at all worried. What model does he refer to? None; the vague reference to “non-linear phenomena” is a giveaway that there’s no there there. So what are we to rely on for his definitive judgment that “consolidation is a must”? His “understanding” that “confidence is potentially at stake.” This is a basis for policy that affects hundreds of millions of workers?

    Meanwhile, I don’t know whether I’m reading too much into this, but Trichet seems to be backing down a bit on the claim that fiscal contraction is actually expansionary — maybe because the alleged evidence for that proposition has been pretty thoroughly debunked, with everyone who’s looked at it seriously realizing that all of the alleged cases involve either an export boom, a sharp fall in interest rates, or both, which makes them irrelevant to our current situation.

    But the message is now free-standing, relying neither on theory nor on evidence: austerity now now now."

  • Comment number 9.

    Both the UK and large parts of the eurozone economy are essentially becalmed or seeing slight headwinds - hoping that a fair breeze will rise up from astern allowing us to glide into the smooth uplands and out of debt. However the longer we wait the stronger the likelihod that any stern breeze will evapourate and the headwinds will increase to gale force. If we all just keep drifting along like this the ship will founder at the first sign of trouble. We should in fact be pumping out the ship like billio so we have some margin to cope with adverse conditions

  • Comment number 10.

    Scottish Speculation?

    Let's assume that Scotland voted in a referendum for independence will they scrap sterling and join the Euro zone - it would make economic sense to break away from the City of London after all. Then perhaps rather than the 5 comments this matter has received in the first day of a blog entry because the British people will be more interested in who heads the ECB.

    Of course, my standpoint is that the whole of the UK should be bothered as the ECB will become our central bank as soon as we break away from the disastrous and crippling banker centric Bank of England that runs the whole British people for the sole benefit of a very few City banker friends. [They got it wrong on interest rates for the 26th month, indeed the 150th month running this week!]

  • Comment number 11.

    I think that the debate on the significance of Mr.Trichets words was put well here.

    "So if you believe that Mr.Trichet was responsible for the fall in the Euro you have to believe that a change of maybe only one month in the ECB’s plans to raise interest-rates is that material."

    Whilst I was wondering how much one month matters I noticed a much more significant point. This comes from America.

    "Now we only have one days evidence so care is needed, but it does allow me to illustrate why I have felt that a new round of Quantitative Easing which would no doubt be called QE3 is not only quite possible but even probable."

    That would be really something to discuss.

  • Comment number 12.

    Top German Politicians Want Portugal To Dump Its Gold In Exchange For A Bailout

  • Comment number 13.

    Twelve comments in a day.

    I'm not sure what SF's point is, to be honest.

  • Comment number 14.

    Better analysis here…

    Ten reasons for thinking the world economy is turning soft

  • Comment number 15.

    "4. At 20:19pm 5th May 2011, ciderwithdozy wrote:

    Blogs just aint what they used to be...."

    A bit of an unfair comment. Would you care to justify your comment or have you chosen not to bother visiting again ?

    BTW, miy blog is !

  • Comment number 16.

    European Central Bank - what is that exactly?

  • Comment number 17.

    'Trichet's pointed comments about the dollar suggests a concern for the rising Euro as well. Lest we forget, the eurozone - particularly the periphery - is relying on an export-led recovery as well. '

    But the euroland is in external balance and has been for years. I don't see how EZ as a whole could adopt german model, which is runnig trade surpluses against other EZ members and in the process basically bankrupting everyone.


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