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November 26, 2012

No, Mario Draghi Should Not Be Person of the Year, Because He Failed in His Effort to Break European Sovereignty

Posted in: Uncategorized

European finance ministers have yet to make any decisions on the Greek bailouts. In general they have to choose whether or not to continue funding the country’s borrowing and on what terms. Will they forgive another portion of Greek debt (this is unlikely)? Will they allow the country a reprieve from meeting EU budget targets for an additional couple years? Will they force more austerity conditions and so-called “labor market reforms” in exchange for these concessions?

Whatever the result, Greece won’t be coming off the mat for a number of years. They will continue to struggle with unemployment over 25%, and they won’t really even make a dent in their debt load. And amid all that, here comes Joe Weisenthal suggesting Mario Draghi should be Time’s Person of the Year.

…contrary to expectations and popular belief, it’s been an extroardinary year of progress in Europe.

That’s best seen by looking at a chart of Italian 10-year bond yields, which have diminished massively.

So how did Draghi do it?

Two programs: The first was the 3-Year LTRO (which was announced right around this time) which funded the banking system. The second was the far more dramatic OMT program, which established that if requested, the ECB could buy bonds of Eurozone member countries to reduce borrowing costs.

All of this seems to obscure two things. First of all, Draghi fixed nothing when you drill down to the real fundamentals for Europe. The debt crisis is a manufactured accounting concern. The real European crisis consists of austerity measures during a slow recovery, which tipped the Eurozone into recession. In fact, that happened THIS YEAR. Why would you give the Person of the Year, in positive terms (Persons of the Year just have to make an impact, including a negative one), to the central banker who presided over a recession in his jurisdiction without even lowering interest rates fully to combat it?

The more important aspect here is that Draghi failed, or at least he has failed so far. NOBODY HAS REQUESTED THE BAILOUTS at the heart of the OMT program. This was not Draghi’s preference. He wanted Spain and perhaps Italy to come hat in hand, so he could impose fiscal policy measures (including the euphemistic “labor market reforms”) from the outside, damaging European sovereignty in favor of a singular neoliberal vision. The story of Europe is that Draghi’s intentions were overcome by the implications of his policy announcement. Spain and Italy did not have to ask for a bailout and their borrowing costs lowered anyway, because the market understood that raising their borrowing rates would simply trigger the OMT eventually. So Draghi’s program worked spectacularly well – better than he intended, in fact. He wanted a strong hand in fiscal policy decisions in Southern Europe, and he didn’t get it.

That’s not necessarily the stuff of Person of the Year. Maybe you can give it to forward guidance in monetary policy.


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