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Jeremy Hobson: In Frankfurt, the head of the European Central Bank Mario Draghi held a press conference. Everyone was waiting to see whether Draghi would announce new stimulus measures, after saying last week that he’d do whatever it takes to save the euro.
Well, here’s what he said:
Mario Draghi: The governing council, within its mandate to maintain price stability over the medium term, and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective.
To help translate that into plain English for us, let’s bring in Diane Swonk, chief economist with Mesirow Financial. She is with us live from Chicago, like she is every Thursday. Hi Diane.
Diane Swonk: Good morning.
Hobson: Well, so what exactly did he just say? What is he saying here?
Swonk: It’s not clear at all. He saying that — well, inflation they expected to decelerate. So under their mandate they can go ahead and do additional stimulus. He’s saying we’re not sure when and we’re not sure how we’re going to do it, but maybe over the next couple of weeks we might figure it out.
Hobson: Well, why would he come out with such a complex statement that doesn’t say much after saying last week, as we said, that he’d do everything he could to save the euro? Everybody’s watching him, why wouldn’t he come out with something clear, simple and strong?
Swonk: Well, that’s a good question. But the reality is that there’s a lot of stumbling blocks to actually use open market operations with the ECB to buy bonds directly. They can buy bonds in the secondary market but there are these facilities set up to fund those periphery countries: the ESM and the ESFS — there’s so many things now we don’t know what they are called. They are set up with a lot of rules that have to be complied in order to give a loan to these countries in debt and to help them out. And it’s not clear how the ECB can work around them or through them to do what they want to do.
Hobson: Well, is this something that is going to have an impact in the United States, the fact that it was a disappointing statement from Draghi?
Swonk: Well, certainly the markets aren’t liking it at the moment. The reality is the last firewall in Europe, right now, is the ECB. We don’t have a strong enough firewall. The ECB could expand its balance sheet enough to actually convince markets that they are going to buy enough time for European leaders to get together on the euro. But the reality is, until they tell us how much they are willing to provide on that firewall and when they’re going to do and how they’re going to do, we’re going to be left scratching our heads going: “Are you really going to save the euro or not?”
Hobson: Well, of course, this comes out just a day after the Fed has came out and basically said ‘we’re basically going to hang back too, for the moment, and not do any stimulus right now.’
Swonk: Yes, but the Fed has been much more clear about how they might do more stimulus and what they think they need in order trigger that additional stimulus. There’s some confusion about that but at the end of the day they did say very clearly they would be willing to expand their balance sheets, if necessary, to keep the economy going. And we know how they would do that, they would likely buy mortgage backed securities and look at the housing markets as one of their tools beyond the treasuries market.
Hobson: Diane Swonk, chief economist with Mesirow Financial, thank you so much.
Swonk: Thank you.
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