SEQUENCING is a favourite word of European Central Bank (ECB) president Mario Draghi. Not surprisingly, doing things in the right order was a feature of his statements at the ECB’s press conference on Thursday.
This means that, before the ECB can wade in and restart buying troubled euro countries’ bonds, governments (principally Italy and Spain) must apply for appropriate financing from the European Financial Stability Fund (EFSF) and the (not yet ratified) European Stability Mechanism (ESM) funds, and accept the attached conditions.
The problem is neither Madrid nor Rome is in any hurry to do so. So, after all the thrills and speculation of the past few days, we are back to square one.
Whichever way you look at this, the ECB’s contingency planning unveiled last week falls far short of the expectations aroused in Mr Draghi’s rather curious speech at a so-called "investment conference" in London on July 26.
The occasion was itself a little incongruous: an event (where Mr Draghi was introduced with due decorum by Bank of England governor Sir Mervyn King) organised by the UK government to promote the UK ahead of the Olympics.
The ECB’s lauded readiness to "do what it takes to preserve the euro" has now been hedged in with complex talk of "guidance" rather than "decisions".
There is much attention to the myriad ECB subgroups who will discuss all this (subject to holidays of course) in coming weeks. As Mr Draghi put it last Thursday: "The monetary policy committee, the market operations committee and the risk management committee will all work together and produce the details necessary for us to take an explicit formal decision." Hardly Churchillian stuff.
If Mr Draghi had said in London that the prerequisite for the ECB doing "what it takes" (that is, outright open market operations) was that "governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist — with strict and effective conditionality in line with the established guidelines" (the words of his opening statement last week), then market reaction 10 days ago would have been a lot less significant.
Mr Draghi was at pains to protest that it was not his fault that the markets had got carried away. "Read the speech," he advised. "The speech does not say anything about timing, bond buying programmes, shorter term."
The saga of Mr Draghi’s statements reveals an occasional inconsistency between what he tells different audiences. Given that his communications strategy on the whole has improved on that of his predecessor, Jean-Claude Trichet (notably because Mr Draghi says less and concentrates on the main points), this is something to which he should pay attention. Another example was his interview with Germany’s Bild-Zeitung on March 21 (when he wanted to convey an upbeat mood to presumably gloom-ridden Germans) that the worst of the crisis was over. He revised his line last Thursday when he said last month had brought "a sense of worsening of the crisis and of the worsening consequences of the financial market fragmentation in the euro area".
With regard to Italy and Spain, we witness now a re-run (although in reverse) of the episodes between the two countries before they joined the euro in 1999. Shortly after José María Aznar was elected Spanish prime minister in 1996, Romano Prodi, then Italian prime minister, tried to persuade Spain, for all sorts of reasons (some sensible, others less so), that the two should make a joint demarche to postpone the Economic and Monetary Union start date.
Mr Aznar turned down the idea, saying if Italy wished to stay out, it would have to do so by itself. We see echoes of this in the weekend statement to the Corriere della Sera newspaper by cabinet secretary Antonio Catricalà, that Italy would be "mad" to apply to the EFSF/ESM funds before Spain. Spanish Prime Minister Mariano Rajoy, although flirting last week with the idea of an approach to the rescue funds, seems to regard the general idea of a formal state bail-out with extreme distaste.
Which brings us to the German Bundesbank and the clearly discernible handwriting of its president, Jens Weidmann, in last week’s ECB statement.
Mr Draghi gave Mr Weidmann a public relations boost at his press conference by making a lot of the Bundesbank’s objections, even though there cannot have been much in the carefully worded statement with which the Bundesbank would disagree. Mr Draghi is one of a dwindling band of still-operating officials and ministers who were caught up in the European currency crises of 1992-93, which played a seminal role in the build-up to monetary union. He knows how risky it is to brook confrontation with the Bundesbank. As director of the Italian Treasury two decades ago, Mr Draghi was particularly affected by the Bundesbank’s decision in September 1992 to invoke the shadowy "Emminger letter" (named after a former Bundesbank president). This allowed the German central bank to make use of a secret agreement in 1978 to withdraw from intervening to support the lira in the Exchange Rate Mechanism, forcing the Italians to leave it.
Who resurrected the Emminger letter in 1992? Step forward Bundesbank chief Helmut Schlesinger, now a sprightly and affable 87, who retired 19 years ago. Right on cue, at the time of Mr Weidmann’s challenge to Mr Draghi’s "whatever it takes" London pledge, Schlesinger last week re-emerged in news briefings and on websites.
The occasion was the 55th anniversary of the Bundesbank’s foundation, for which the central bank staged an intriguing joint interview with Mr Weidmann and Mr Schlesinger upholding the bank’s "stability-first" principles.
Schlesinger is nearly twice the age of 44-year-old Weidmann, who could be his grandson.
The two get along well. Mr Weidmann bears a strong resemblance to a younger Mr Schlesinger. The joint message appeared in the Bundesbank’s normally obscure staff magazine. The publication has now become a centrepiece of the Bundesbank’s website, including in a fully-fledged English-language version.
Mr Weidmann’s uncom-promising stance on the Bundesbank’s anti-inflation independence, backed by Mr Schlesinger as the bank’s monetary overlord, is of more than mere symbolic importance. Mr Weidmann is putting to one side his nominal extreme minority position on the ECB governing council.
Significantly, and contrary to indications by Mr Draghi himself, the ECB council took no actual vote on the bond-buying "guidance" at Thursday’s meeting.
Mr Draghi and Mr Weidmann, each anxious that neither should be blamed for any euro breakdown, are trying not to become embroiled in real confrontation.
So, in the coming weeks of euro vulnerability, we shall see further signs of both central bankers shifting responsibility for resolving the crisis to the place they believe it belongs — European governments. The secret, after all, lies in the sequencing. Governments, not the ECB, should take the lead. We shall soon find out if they agree.
• Marsh is chairman of the Official Monetary and Financial Institutions Forum.
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