The Telegraph il 6 agosto 2012, By Ambrose Evans-Pritchard
So we enter the treacherous market month of August with Europe in limbo. The actors wait upon each other. World finance held hostage to a fiendishly complicated game of diplomatic chess.
The European Central bank will not move until Spain requests a full sovereign rescue from the EU bail-out fund (EFSF), and cedes yet more ground to EU commissars.
Spain in turn will not move until the ECB lays out the exact terms of any deal, and until the Teutonic bloc signals whether it intends to crush Spain into abject humiliation – a la Grecque – or seek a fraternal outcome.
Madrid has no bond auctions in August. It can in theory hold out until October, if it is willing to let contagion spread to the last redoubts of corporate solvency.
Global markets were surprised by Mario Draghi’s refusal to deliver instant ECB salvation last week. They should not have been.
We have known for weeks that the `Draghi Plan’ for mass purchases of Spanish and Italian bonds requires the political trigger of an EFSF bail-out, with supplicant states signing a “Memorandum”. The EFSF is the enforcer. The ECB is the cash cow. One unlocks the other.
The Bundesbank‘s Jens Weidmann is isolated. The Dutch and Finnish governors backed the Draghi plan. So did Germany’s member on the ECB’s executive board, Jörg Asmussen. The Kanzleramt has lost patience with the ideological preening of the Bundesbank.
Mr Draghi has secured a mandate for “unlimited open-market operations”, a far cry from the half-hearted and self-defeating bond purchases of the last two years. The ECB at last has a licence to act with overwhelming force, like the US Federal Reserve.
The Governing Council has formally stated that “convertibility risk” — ie, euro break-up risk — is playing havoc with monetary policy, pushing Club Med debt costs out of control.
The term is crucial. Italy and Spain are deemed victims of forces beyond their control. Action by the ECB no longer constitutes a “fiscal rescue”. The `no bail-out’ clause of the Maastricht Treaty has been elegantly finessed.
Markets may dislike the complexities of this. They should not misjudge the radical shift in policy that has occurred.
Italy’s premier Mario Monti — working in tandem with Mr Draghi — has worked assiduously on a parallel track, touring Nordic capitals collecting affidavits from hardline leaders. Each has grudgingly agreed that markets are unfairly punishing the victim states.
The two Italians have locked down every resister one by one. Whether you like it or not, the performance are masterful. Venetian diplomacy lives yet.
Mr Monti has left little doubt that Italy will activate the rescue machinery once his ducks are in a row, though it must rankle deeply. His country has a “primary surplus”, the best fiscal profile in the G7, and its second-lowest aggregate debt (260pc of GDP).
First he must persuade Spain’s Mariano Rajoy to commit a humiliating U-turn, request a bail-out, and fall on his sword.
Mr Rajoy has already shifted ground. A sovereign rescue was out of the question a week ago. By Friday he was haggling about the price. ” We don’t know exactly what is being planned. I want to know what these measures are. Then I will take the best decision in the interest of the Spanish people,” he said.
Hence the 6pc surge on Madrid’s bourse on Friday. Investors are already pricing in a bail-out, with the ECB bazooka that lies behind it.
Yet the Draghi plan can still go badly wrong. Much of North Europe’s political class clings to a warped narrative of what has gone wrong in EMU, attributing the crisis to fiscal debauchery and Latin failings. They misdirect their wrath. The enemy is the currency itself. It is a structural crisis, a misalignment of cycles and real interest rates, a sorry saga of unbridled capital flows.
Without rehearsing the tedious details of this debate, let us remember that Spain ran a budget surplus of 2pc of GDP during the Trichet bubble. Italy scores top of the IMF’s fiscal sustainability index, far above Germany, France, Holland, Britain, the US, and Japan.
It is the euro that is suffocating Italy and Spain. They have the wrong intra-EMU exchange rate, and no sovereign control over anti-cyclical policy levers. The debt crisis — a misnomer — is a sympton. The sooner they break free, the better, for them.
Nor is the Monti-Rajoy axis is not as weak as it looks. The Latins can inflict a deflationary shock and banking crisis on Germany at any time by walking out of EMU and imposing capital controls — as a chorus of leading economists now advocate — if provoked. Who really holds the aces in this game of poker?
As Mr Monti said in Helsinki, we will soon see a “eurosceptic government taking power in Italy” if the current farce goes on. The warning could hardly have been clearer.
But do they understand this in the Bundestag or the Tweede Kamer, or even want to understand? Or will they demand Carthaginian terms to placate their own electors before agreeing to any EFSF loan package? Will they push the great imperial capitals of Rome and Madrid one step too far? The bargaining is fraught with execution risk, as they say in Canary Wharf.
Just to be clear, I do not “support” the Draghi plan. It perpetuates a failed monetary union. The North-South gap was allowed — by errors on both sides — to go beyond the point of no return in those early years of complacency and triumphalism.
Perhaps it is theoretically possible for Spain to claw back lost ground by means of an “internal devaluation”, that is to say by driving unemployment towards 30pc until it breaks the back of labour resistance to pay cuts — though how you can pursue scorched-earth policies across Club Med for year after year without drawing north Europe into the fire is never answered.
But even if it could be done, it should not be done. It is a disgraceful policy. Nor is it morally or strategically desirable to hold the euro together. The EMU project is a covert assault on the historic nation states of Europe. Any attempt to save it by escalating to fiscal union is to eviscerate parliamentary democracy. There lies grave danger.
Yet it is churlish to deny that the two Marios have pulled off a feat of statecraft. They have wrested control of the ECB from Gold Standard zealots.
The ECB is preparing to act as a genuine lender-of-last-resort for the first time, once the EFSF trigger is activated. It may soon start to reverse the frightening monetary contraction that has bedevilled southern Europe for the last year.
Europe remains a political minefield, but the risk of a global deflationary slump has dropped a notch. Hats off to the Italians.