I welcomed Mario Draghi’s full commitment for a monetary policy meant to reduce spreads in the euro-area government bonds (“to the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate”). As I always say, even simply an announcement of that kind would go miles to reduce the cost of debt for sovereign borrowers of the euro area.
I also do not underestimate the battle he is going through with the German Bundesbank to get the right policy in place: his moving forward is the flip coin of the increasing weakness of the hardliners that are seeing the credibility of their austerity strategy weaken day by day.
But let me also repeat that while fully expansive monetary policy is a necessary condition for saving the euro area, it is by no means sufficient. And here is where Dr. Draghi, playing outside of his home turf, is at a disadvantage and provides an insufficient analysis of the challenges ahead.
Dr. Draghi compared the euro area to a bumble bee, the insect that, according to him, “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.”
Dr. Draghi is a fine expert but clearly not an entomologist. Otherwise he would have known that:
a) Bumblebees are real bees and do not graduate into anything else. Think of them as monetary unions, like the USA one, big and capable of flying no matter what their internal complexity is. The regular bees are like the United Kingdom, lighter, easier to manage and … less powerful. Indeed, unlike a honey bee’s stinger, a bumblebee’s stinger lacks barbs, so it can sting more than once: monetary unions are powerful stuff, that help its members become more effective in a geopolitical sense.
b) Why do bumblebees fly? Because they beat their wings very very fast: quick repetitive power. And, contrary to the common belief, they generate power on the upstroke and downstroke, applying much more muscle and succeeding. That is the right way to see the euro issue and its difficulties in being a strong bumblebee: in the first years of its existence the euro currency area bumblebee showed strength by generating power during the upturn of the economy and gaining an anti-inflationary reputation. But now it seems at odds in fighting the downturn, not being able to acquire a credible anti-austerity economic policy. It is slow to respond and looks like a fatigued bumblebee, at risk of dying.
c) Actually, bumblebees, at least some of them according to Wikipedia, are disappearing fast from Planet Earth. We should not take their existence for granted and irreversible.
So as usual with everything in Nature, there are strong and weak bumblebees. Indeed, comparing it with the USA bumblebee Dr. Draghi said of the euro bumblebee:
“…it also has a degree of social cohesion that you wouldn’t find … in the (USA) …”
Oh, big mistake.
Dr. Draghi seems to claim that average social cohesion is higher in Europe than in the USA.
But cohesion does not work like inflation: you can’t simply average out national levels of local cohesion to obtain average cohesion in Europe. We know Italy and Germany are cohesive, each one within their respective borders, possibly more than Mississippi and Massachusetts are within theirs. However Europe would be more cohesive than the USA only if Germany and Italy shared more values among them than the ones that Massachusetts and Mississippi do.
Tough luck, impossible.
On cohesion, unfortunately, the euro bumblebee is weak. Simply because it is too young and has not yet learned how to fly well and steadily. In that regard, the United States are more cohesive than the euro area because – for 2 centuries now – a common history has been slowly fertilizing the Stars and Stripes Union. There was a time when the US bumblebee was as weak as the euro bumblebee is today, but that was a long time ago and the US bumblebee weathered the storms that jeopardized its existence. Some of that was sheer luck. Most of that was smartness and willingness to survive.
How so? In many ways. But, for what matters here, simply note that growth policies in the USA or lack of them in Europe exacerbate this growing cohesion divide across the Atlantic. To realistically catch up on our “cohesion gap” with respect to the USA we should pursue even more expansive policies in a downturn than America is doing. Exactly the contrary of what has been done so far.
The euro bumblebee is feeble and any storm could exterminate it. It needs to grow fast now, today, so as to gain cohesiveness, but without putting new wings that its weak young body would never support (as for example the surrender of national sovereignty, that took more than a century in the United States to materialize).
Only expansive monetary and fiscal policies in the euro area can save it. So far we have a promise from Draghi of an expansive monetary stance. Not too late, but too little for the bumblebee to survive.