The story you are about to hear is true, and by true I mean false. It’s lies, all of it. But they are entertaining lies, and in the end isn’t that what’s important? The answer is no.” — Leonard Nimoy ’the Simpsons‘
Image: APECB chief Mario Draghi still believes in fairies — the confidence fairy that is.
He still believes that the key to growth is to tighten the belts, and that that will deliver confidence, and that that can deliver growth.
Here’s a key (disappointing) section from a new interview he did with the FT.
FT: Coming to the fiscal pact, what is your answer to those who say there is excessive concentration on budgetary rigour at the expense of competitiveness and growth and that actually what is being created is a “stagnation and austerity union”?
MD: The answer is that they are right and wrong at the same time. They are right because there can’t be any sustainable economy without growth and competitiveness and job creation. They are wrong if they think that there is a trade-off between the two. There’s no trade-off between fiscal austerity, and growth and competitiveness. I would not dispute that fiscal consolidation leads to a contraction in the short run, but then you have to ask yourself: what can you do to mitigate this?
As for the notion that his latest liquidity measures to banks will allow them to turn around and buy sovereign debt — — he says: No so fast.
FT: Will the three-year refinancing operations give banks an incentive to buy “periphery” eurozone bonds?
MD: . Of course banks also have capital difficulties, and these measures don’t necessarily help them on that side. The objective is to ease the funding pressures that banks are experiencing. They will then decide what the best use of these funds is. One aspiration is to have them financing the real economy, especially small and medium sized enterprises (SMEs). What we are observing is that small and medium sized banks are the ones having the biggest funding difficulties, and they are generally the ones who provide most of the financing for the SMEs. And SMEs account for about 70 per cent of employment in the euro area’s corporate sector.
Draghi’s bottom line — at least officially — is that the Eurozone crisis is all about fiscal profligacy, and that it can be contained. The ECB’s job is to keep inflation stable and provide funding for banks, end of story.