Tweet
European markets have surged over the last 24 hours, basically entirely due to a speech by Mario Draghi, the head of the European Central Bank. He said that his organization would do “whatever it takes” to save the euro, and that was apparently all it took.
In a speech in London, ECB chief Mario Draghi said the words that many worried European officials had longed to hear: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. . . . Believe me, it will be enough,” he said, according to wire reports.
The promise immediately renewed hopes for saving the 17-nation European currency bloc, and sent markets soaring — the Dow Jones industrial average closed up 1.67 percent, Germany’s DAX rose 2.75 percent and Spain’s IBEX 35 closed up 6.06 percent.
More significantly, yields fell on Spanish and Italian government bonds, a relief from the dangerously high levels they had hit in recent days. Bond yields are the cost governments have to pay to borrow money, and unsustainably high rates could push the nations to seek costly bailouts from the rest of the euro zone, as happened with Greece, Portugal and Ireland.
This is definitely a shift in Draghi’s perspective, given that he has stressed repeatedly that people should not rely on the central bank. But what did he really say? I think less attention has been paid to the “within our mandate” clause. The ECB has used that in the past to basically shut down any talk that they would buy up sovereign debt or bail out banks directly. Draghi could easily decide that the ECB doesn’t have the authority to print money and save the day. But people are so starved for leadership on Europe that the mere suggestion, however hedged, of action was enough to create tangible relief. The Spanish bond yield is down to 6.75% and falling, almost a full point below its high.
More broadly, it’s interesting to see how much power central bankers still have, just through statements, to move the market. The Federal Reserve has not used its communications channel to, say, allow that they would accept a higher inflation target. That alone may set some market forces in motion, if this incident with the ECB can be used as a guide. Bankers do have the ability to generate “ammunition” with their communications, regardless of the level of the interest rate or even the fundamentals.
However, before too long Draghi will have to back up this talk with action, given the perilous state of Europe and the continued weakness of many of its economies. Saying you’ll save the euro is one thing; actually taking the steps are quite another. And the ECB hasn’t earned full confidence on that front just yet.
14 Comments
Support this site!
Subscribe to the newsletter
Advertise on Firedoglake
Send
us your tips
Make us your homepage
About FDL News Desk
The confidence fairy bestows prospertity on euro traders and bankers..for a little while……… Im trying to create a pantheon of all of the magical Deities responsible for the mysterious phenomena associated with the practice of the mystical faith of freemarketcapitalism..so far i have, “The confidence fairy“, “The invisible hand” and “Animal Spirits”.i would appreciate additions from anyone initiated into its mystery rites.
Are you going to include magical Axioms like the Efficient Market Hypothesis?
Generate ‘ammunition’” to “fix the market. Wish they’d just neuter the goddamned thing and get it over with.
I love it. The euro is saved – - for now. But you can count on it. It will break down again, maybe next week.
The lanquage of the capitalist “free market” is a thing to behold. No one has mentioned the liquidity trap or inflation or austerity or depressions or recessions or fraud or NAIRU or the thing that blows everyone’s mind, the IS-LM curve or little things like unemployment and poverty.
Dare not fuck with the free market you know.
Saving the euro and inflating asset valuations with welfare liquidity means more austerity that further depresses the economy.That’s not a prediction , just a strong grasp of the obvious .We’ve been living this reality .Ben prints trillions and uses unemployment to buffer the inflationary impact .Economists refer to the tactic as the Philips curve ,at least the few smart ones who can think for themselves .
I just don’t get the vitriolic manner in which everyone speaks of capitalism and free markets on this site – as if there was some obviously superior alternative available that everyone just keeps overlooking. I think the problem is that our economy isn’t actually free market capitalism at all, but an unholy collusion of big government, special interests, and crony capitalism. The problem isn’t free markets and capitalism per se; it’s the bastardization of capitalism into a special-interests/political monstrosity that serves the few insiders at the expense of everyone else, and worse, robs all of us of the opportunity to realize our full potential.
@solerso asks about the “invisible hand” and “animal spirits”. It’s not so hard to understand. That’s what’s great about capitalism: it’s very closely aligned with human nature. 1) You get to own things (including your time), 2) You can trade those things (in a market) for something someone else has (making both of you more wealthy), 3) The government protects your stuff from theft, and the market from manipulation. The government also collects a fee for its services, and provides help in areas that the market doesn’t serve well (such as basic R&D, infrastructure, defense, etc.). That’s pretty much it.
The invisible hand is just the action of the market. Prices go up and down. No one is controlling or manipulating it, it just happens because lots of individuals decide to participate or not (based on price, availability of products etc.) The “invisible hand” makes all kinds of decisions about production, allocation of resources, salaries etc. The decision making is distributed and safe from manipulation (enforced by the government).
Animal Spirits is just your desire to better yourself by participating in the market. There is no limit to how much wealth you can accumulate, so go get it! But you can’t just steal it from someone else – they have to willingly trade with you for it. Find a better way to serve their needs, and the world will beat a path to your door. Isn’t that motivating?
Now, I paint a very idealistic picture here, and certainly our current economy resembles this description only barely, but if you are going to attack capitalism, then attack what I’ve just described and tell me how your system is going to feed, cloth, and improve everyone’s lives better than the free market. If your argument is with the corruption of capitalism, then I’m on your side! Let’s fix it! But any system can be corrupted. Let’s not throw out the best economic model the world has ever invented just because we’ve allowed it to become perverted. Let’s undo the corruption.
Ok, now let the thoughtful and insightful comments begin (let’s see, “dellusional”, “wingnut”, “pig”. That should do for starters ;)
The idealized system you are describing is of another era, if it ever truly existed at all. The system we have today IS what capitalism has become. You are making the same argument, in reverse, of what communists said about the Soviet Union, namely: communism is really a wonderful system, it’s just that this system has been corrupted so that it’s no longer true communism. Neither of these systems, capitalism or communism, can be viewed as an idealized construct–they must be looked at as they actually are.
there is no point in responding to this with thoughtful and insightful comments.
They were cynical ideologies, capitalism being the dominant of the two. But now, for most of us, the wool is lifted.
Excellent description of the situation. The problem is not with capitalism per se but with crony capitalism evidenced by the TARP and GM bailouts, the refusal to cut defense contractor welfare programs, and the ongoing bailout of corporate America through the Fed’s monetary policies (among many other things). Big business and big government reinforce one another. This was/is the primary message of both the Tea Party and Occupy Wall Street movements.
A politician said you should believe him. In poker, this is called a “tell”.
Thank you for your comment. It is interesting to consider the Tea Party and the Occupy movement as being two sides of the same coin: a desperate plea to wrench control of our society back from the insiders and power brokers.
@caleb36: Yes, I agree that what we have today is what capitalism has become. But unless we have an ideal to compare it with, then we won’t know how to fix it. We all must have something we believe is the best possible world, and work to try to achieve it. We know we will never fully get there, but with no ideal to guide us we become jaded and useless.
Hi hellcat ,I was taught that a free market model’s central planning is done by banking. Is this your view ? If it is . are you proposing it in a statist context .If the answer is yes ,then how would you prevent the ”unfixable ” form of corporate communism we have now ? I believe in the invisible hand with entrepreneurial capitalism where there is market accountability ,but I can make the same case for autonomous Marxism or barter-based collectives Now ,we have a system of inverted totalitarianism , with the entire market system underpinned by systemic fraud and moral-hazard socialism .You sound like a recent Ron Paul enthusiast ,which is fine ,but even this very principled man has no plan that can take on the fascist regime of ruling kleptocrats .
Oh . as to what I believe ,small-cale anything ,but I prefer universal capitalism with esops and collectives having systemic accountability that has non-heirarchal emphasis on local sustainability .