Friday, 3 August 2012

The Politics of Credibility and Inaction

In the postscript of my last article I noted that the difference between theory and action is the difference between masturbation and sex. This was amply proven in yesterday's press conference where Mario Draghi has said that doing whatever it takes (to save the euro that is) might take weeks or months. On hearing this, world markets started moving downwards. It now seems that the ECB governor has found out the hard way that when officials with perceived credibility and a certain position of responsibility say something important, people and thus markets believe them.

Now, Draghi can say goodbye to his credibility. Who will believe a leader if all he does is promise and never deliver? Especially if the specific leader holds the key for reversing the situation in the Eurozone. In response to the recent developments even Obama started making comments about trusting the EU leaders to do what is right (hmm I wouldn't bet on that Barack). His Secretary of the Treasury, Timothy Geithner, (the guy who tried to sell his house in the midst of the sub-prime lending crisis. Now if that isn't being optimistic I don't know what is!) even came to Europe to meet with EU officials. Indecisiveness in the EU can be spotted all the way across the Atlantic and they expect us here not to notice it?

While in Europe, Tim met with my friend Wolfgang (Schäuble that is) and urged him to take immediate short-term measures to support Spain and Italy. (Obviously the Americans don't really care about Greece or Cyprus. Well if they were thinking straight they would. Here is why). Both stated that they have confidence in the member-states efforts. To be honest, I believe Tim, it's Wolfgang I do not trust.

The Germans have a history of seeking financial stability and a low inflation said Tim. I do not think that anyone would disagree on that. It's a wonderful policy and it should be pursued. Nevertheless, it should be pursued when the economic climate allows you to do so. The delay of significant measures to halt the recession will only worsen the situation. (If you don't believe me read about what happened to the Americans during the Great Depression in the early 1930's and during the same period in the UK when policy makers did not want to abandon the gold standard.)

In the end, it all boils down to credibility. A man of higher standing such as Draghi cannot make any statements concerning policy and then try to avoid implementing them. People lose their credibility much faster than they can regain it. It seems that hordes of economists all over the EU have forgotten the consequences of the non-credibility of Central Bankers. The same problem holds throughout Europe. Think about any government. Who would you believe if they said anything concerning policy? Governments in Cyprus and Greece stated that they would not need any help in overcoming their financial strains only days before applying for help. There only two kinds of officials in Europe that I would trust (of the ones involved in the crisis I mean. I have nothing against Scandinavian, Dutch or Austrian governments which are one of the most stable economies in the world): the Germans when it comes to denying any help (and not in saying that they will do anything to help the Euro) and Mario Monti who seems never to say more than is needed.

However, with credible or non-credible leaders the need for decisions remains. In a world where inertia and idleness do nothing but wrong, we have to able to move fast and without hesitation when needed. If it takes 10 summits and 100 voting procedures every time the ECB wants to pass and implement a plan of action then we are going to be forever lost in a bureaucratic troubled ocean.

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