Last Thursday, Mario Draghi, the President of the European Central Bank, was unable to move the capital and money markets with his customary monetary policy Press conference in Frankfurt am Main. On the contrary, North Korea’s leader Kim Jong-un, a global castoff, did it the next day just by pressing a button. However, it took the test explosion of a most powerful nuclear warhead of 10 Kilotons to move the markets. Both those events happened last week and at first reading are completely unrelated.
However, they both had a quantifiable effect on the markets. The first had no effect at all while the second did move them. This comparison is meant to show, how vulnerable the overgrown capital markets of our brave new world may be, in view of unpredictable developments. On the one hand, markets had more or less discounted Draghi’s decision to leave monetary policy unchanged. On the other hand though, it’s quite impossible to foresee when and how the North Korean despot or any other outcast will decide to move the world, with a nuclear test or with anything else, as it was the case last week.
Judged from their results though, the two incidents are closely related as far as their repercussions are concerned. For sure if the North Korean dictator had chosen to do something more menacing, Mario Draghi would very possibly have been obliged to announce more money printing, in order to soothe the market turmoil Kim caused with his nuclear toy. What can be more frightening than a 10 Kiloton nuclear bomb test is very likely a larger one or one mounted on a strategic missile and sent to hit the water near South Korea or Japan.
As a matter of fact, this is the first time that a North Korean menace has clearly and directly moved the global capital markets. The Reuters news agency reported that stocks in Wall Street fell sharply on Friday, after the nuclear test in North Korea was detected. It drove the S&P index lower in the worst market day since June. In detail, the Dow Jones industrial index fell by 2.13% and the S&P closed 2.45% lower, while Nasdaq lost 2.54% at the last day of last week. Altogether, those three New York stock market main indexes had their worst week in months.
Kim likes plaguing the markets
Now, what if Kim Jong-un decides to explode his next nuclear bomb or whatever he is secretly machinating, at a time when the world markets are having a bad turn? He must have certainly noticed that his last Friday’s explosion has rocked the global economy. So, from now on he may choose to explode his devices at the worst timing for world markets, mainly targeting at the New York stock exchanges.
In this way, the capital markets, mainly the ones of the western world, may enter an era when their prospects will be made dependant on external, and thus rather unpredictable factors, to a much larger extent than today. As a result, insecurity may become the main guiding force of the systemically agile capital and money universe, at the same time destroying its effectiveness. Not without good reason then last Thursday Draghi said, “available evidence so far suggests resilience of the euro area economy to the continuing global economic and political uncertainty”.
Draghi sees that
The careful reader would note the semantic use of the expression “so far suggests resilience”. Obviously, he is aware, that the global environment becomes every day more unpredictable and therefore more menacing. North Korea or somebody else may open the door for the world to enter in a new and terrifying age. Even worse, there might be a global power center ready to play with fire and try to use the Pyongyang lunatic or any other madcap for its own goals and further destabilise the global scenery.
As it turns out, the ECB seems to recognize the worsening of the global scenery, but appears unwilling to take more vigorous action in support of the ailing Eurozone. Draghi indirectly said that when he stated “our baseline scenario remains subject to downside risks”. Yet, he refused to take action now. The euro area’s central bank is still seemingly under the strong influence of the German financial orthodoxy, rejecting the use of more effective monetary measures to overcome stagnation and prepare for the next rainy day.
The international scenery is becoming every day more complex, unpredictable and perilous. Yet, Eurozone dragged down by Berlin remains motionless. Even with the available basic statistics, the ECB is not up to its mandate to maintain price stability and take action to bring inflation close to the statutory target of 2%. ECB’s extraordinary monetary measure of monthly asset purchases of €80 billion has so far proved not enough to winkle out inflation from the zero area.
On top of that, this program expires next March. If the currently applied policies continue unchanged, it’s rather impossible in the brief period of the next six months for inflation to rise close to 2%. Despite all that, the ECB strongly pressed by Germany, didn’t announce an increment of the monthly asset purchases nor did it prolong the period of the plan.
It’s always Germany
In other words, Eurozone may be caught without strong defensive walls in the event of an unexpected development in the global backdrop. Europe’s economy remains defenseless, just because Germany stupidly enough longs to safeguard its huge financial reserves at any cost. Alternatively, Berlin could have decided to use a small part of those reserves to fortify Eurozone’s collective financial markets and still keep the ownership of the resources employed.
The current arrangement in the euro area, with Germany accumulating reserves and the rest of the member states piling up debt, is explosive and has started steaming. The damage has already been made. Europe’s political background has cracked and its financial superstructure is full of risky assets.
What if the next North Korean 10 kiloton nuclear bomb is mounted on a strategic rocket to be fired? Would the euro area’s banking structures be able to stand the heat? Will the North be safe if the South crumbles? Is there enough interconnectedness to spread the disease?
The clock is ticking and Berlin has to answer those questions before the next ECB Governing Council convenes on 20th October. Otherwise it will be just too late.