Draghi sees inflationary bubbles

Sharon Bowles (ALDE, UK), chair of the European Parliament Committee on Economic and monetary affairs and Mario Draghi governor of the European Central Bank. Monetary dialogue, 18/02/2013. (European Parliament photographic library).

The governor of the European Central Bank, Mario Draghi, speaking yesterday in the Economic and Monetary Affairs Committee of the European Parliament, in an unexpectedly strong statement said that the euro area is still open to “potential inflationary bubbles”. He then added that “the possible effects of Euro exchange rates on inflation must be monitored while banks need not only a strong single supervisory system but also common crisis resolution rules”. The members of the Committee observed that the banks need to increase lending to the real economy and the ECB has to look into that. Let’s follow the discussion.

What inflation?

Euro parities, however, with the major currencies like the dollar, the English pound and the yen have substantially strengthened during the past few weeks reducing imported inflation risks rather than increasing them. As a result, an interpretation of Draghi’s comments on potential inflationary risks in the euro area can be connected only to the extra liquidity the ECB has lent to banks. That is why he then added that banks need urgently “common crisis resolution rules”.

Very probably, the ECB is preparing the ground for a controlled withdrawal of the extra liquidity accorded to Eurozone banks under the two Long Term Refinancing Operations, conducted twelve months ago. On this occasion, the ECB passed on to banks more than one trillion to almost every Eurozone bank. Now seemingly, ECB is eager to see the banks being protected by this new mechanism after the extra liquidity will be withdrawn. Evidently, Draghi cares for the banks more than they themselves care for their own financial health. That is why Draghi stressed that the banks resolution mechanism is urgently needed.

The ECB is very eager to see the single supervisory mechanism being decided towards the mid of this year. This will be the first step towards an integrated “banking union”, which includes components such as a single rulebook, common deposit protection and the single bank resolution mechanism. Draghi added that common rules for resolving bank crises must be established rapidly.

Everything for the banks

Obviously, the governor of the ECB is now promoting the single bank resolution mechanism so as the Eurozone banks will feel “safe” to continue betting other people’s money on risky placement. As usually, if those bets go well, the profits will be pocketed by the bank’s shareholders and management. If the bets turn sour, the single bank resolution mechanism will undertake to pay peoples’ deposits.

A beautiful world created only for banks. No MEP found the courage to denounce the unholy alliance of ECB with the commercial banks. It is evident by now that the Eurozone authorities and the ECB do not want to prevent banks from spinning around people’s deposits. The denial to institutionalise a clear split between banks approved for accepting deposit and investment banks is like prolonging the risks of a potential catastrophe the banking system can cause to the real economy.

Investment banks should then be forced to bet their own money and not put the entire system at risk. Instead of that, Draghi is pressed to see enacted the bank resolution mechanism to wholesale safeguard banks from their own carelessness.

Many MEPs, however, urged the ECB to do more to encourage banks to lend to the real economy. The fact that the banks do not increase their lending despite having cashed in trillions from the ECB is an infallible witness that they use this money for risky bets. At this point, also Draghi defended the banks by saying that, if the ECB forces the banks to lend to SMEs and the households, then the central bank has to be responsible for those loans. Obviously, according the Draghi the banks should be relieved from any responsibility, if they lend money to the real economy and the ECB should under-rewrite those loans. At the same time, the ECB does nothing to stop the banks from undertaking risky bets with depositors’ money. As they say “heads I win, tails you lose”.

Draghi, was asked by left of centre MEPs whether the ECB would advocate “lighter touch” austerity in the countries hardest hit by the crisis. He replied that, “the solution was not to postpone austerity measures, but to devise them in such a way as to reduce their negative effects”. As if there existed a clever way in making the poor poorer. But Draghi doesn’t care much about that.

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