Given the tsunami of reporting about Mario Draghi’s remarks at an investment conference in London, not to mention the following market reaction, it’s kind of strange how few links I’ve seen to what the president of the European Central Bank actually said, which was considerably stranger than you’d gather from the coverage — and had a definite plaintive note, too.
Here’s the passage from his speech, delivered on July 26, that caught my eye: “The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years.
“And now — and I think people ask ‘How come?’ — probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis. The bumblebee would have to graduate to a real bee. And that’s what it’s doing.”
Only considerably later did Mr. Draghi make the declaration that the E.C.B. would do “whatever it takes to preserve the euro” — a declaration everyone seized on, but which may mean little.
The thing is, we know pretty well why this bumblebee was able to fly: massive capital flows from the core to the periphery, which led to an inflationary boom in said periphery, and which therefore also allowed the German economy — which was in the doldrums in the late 1990s — to experience a big gain in competitiveness and hence a surge in its trade surplus without needing to go through painful deflation.
This meant, in turn, modest inflation in the euro zone as a whole — slightly above 2 percent over 1999-2007.
To keep the thing flying, you’d need something like a reverse play along the same lines: an inflationary boom in Germany, so that the periphery could regain competitiveness without devastating deflation. And it would actually have to involve a higher rate of inflation, both because the required adjustment is bigger and because the periphery is a smaller share of euro area gross domestic product, which means that overall inflation needs to be higher to accommodate a given amount of relative adjustment.
Nothing like that is happening. Germany is arguably close to full employment, but not in an inflationary boom; expected euro area inflation appears to be less than 1 percent.
And as for graduating to a real bee — that will take time that Europe doesn’t have.
DISAPPOINTED INVESTORS
Remarks made by Mario Draghi, the president of the European Central Bank, during a speech at a London conference on July 26 were interpreted by many investors as a signal that the bank would soon buy sovereign bonds in order to combat rising borrowing costs in struggling nations. “The E.C.B. is ready to do whatever it takes to preserve the euro,” Mr. Draghisaid. “And believe me, it will be enough.”
Anticipating a bold bank intervention, global markets rallied after the speech. The euro rose against the dollar, and yields on Spanish and Italian bonds dropped sharply.
But a week later, rather than unveiling the rescue plan many investors and commentators expected, Mr. Draghi quashed hopes that the bank would take action. After a meeting of the E.C.B.’s 23-member governing council on Aug. 2, Mr. Draghi said at a news conference that the bank’s plans might include the purchase of government bonds, but only after governments applied for aid and if the European bailout fund had acted first. Mr. Draghi also mentioned that Jens Weidmann, the president of Germany’s Bundesbank, was the only member of the council who was opposed to E.C.B. intervention.
Disappointed investors quickly sent Spanish and Italian bond yields back up.
“He misguided the markets,” Jorg Kramer, the chief economist at Germany’s Commerzbank, told Jack Ewing, a reporter for The International Herald Tribune. “He raised expectations which he could not fulfill.”
In his analysis of the events, Mr. Ewing noted that “investors may also be facing the reality, no surprise, that the bank’s attempts to lower borrowing costs for Spain and Italy could be constrained by continuing German opposition to bond buying.”
From Mitt Romney, Misplaced Praise for Poland
On the third leg of his recent foreign tour, Mitt Romney lavished praise on the Polish economy: “When economists speak of Poland today,” he said in a speech on July 31 in Warsaw, “it is not to lament chronic problems but to describe how this nation empowered the individual, lifted the heavy hand of government and became the fastest-growing economy in all of Europe.”
It wasn’t quite as big a blooper as his praise for Israel’s single-payer-plus-price-controls health care system, but it wasn’t good.
For one thing, Poland has a substantially bigger government than the United States; in 2007 — that is, pre-crisis — the Polish government spent 42 percent of gross domestic product, compared with the United States government’s 37 percent. And despite what Romney claimed, there was no obvious trend toward smaller government. Polish spending as a share of G.D.P. was about the same in 2007 as in 2000. Oh, and Poland has universal health care too.
Beyond that, there’s a good explanation for Poland’s relative resilience in the crisis compared with most of Europe: currency depreciation, or as Republicans put it, debasing the currency (note that the rise shown in the chart on this page is a fall in the zloty).
When capital was flowing into the European periphery, Poland responded with appreciation rather than inflation, and when the capital flows dried up, Poland quickly regained competitiveness with depreciation, rather than having to rely on slow grinding “internal devaluation.”
So actually Poland’s success suggests that (a) big government isn’t so bad and (b) sometimes it’s good to debase your currency.
Doesn’t anyone tell Mr. Romney to do his homework?
Dooh Nibor
There has been lots of justified talk about a new Tax Policy Center report (at taxpolicycenter.org) on the distributional implications of the Mitt Romney’s tax plan, showing it to be very much a “Dooh Nibor” — that is, reverse “Robin Hood” — thing. President Obama is talking it up; Mr. Romney, predictably, is dismissing the report as the work of a “liberal group.”
The question one might ask is, did the Tax Policy Center — which is actually, painstakingly and painfully nonpartisan — make questionable assumptions to get its results, so that some other set of assumptions might portray Romneynomics in a more favorable light? And the answer is no: the center bent over backward to literally give Mr. Romney every possible benefit of the doubt.
Here’s what analysts at the tax center did. They took Mr. Romney at his word that he plans to offset his cuts in income tax rates by broadening the base — that is, limiting exemptions and other loopholes. They also assumed, however, that Mr. Romney would not be willing to tax dividends and capital gains as ordinary income, since he has made it clear that he opposes any rise in taxes on investment income. As they point out, this leaves a relatively small pool of loopholes to close — big enough that the Romney tax cuts could, in principle, be paid for by base broadening, but not with a lot of room to spare.
So which loopholes are closed? The Tax Policy Center made the most Romney-friendly assumption they could — namely, that base broadening is concentrated on top incomes as much as possible. First you eliminate all deductions that benefit those with more than $1 million in income; then all that benefit those with between $500,000 and $1 million; and so on.
The key point is then that even if you do this, the tax cuts Mr. Romney would give high-income Americans are bigger than the loopholes he could conceivably close.
So they’re actually giving Mr. Romney every possible benefit of the doubt — and still his plan is a redistribution from the middle class to the rich. In practice it would surely be much worse.
