Last Week They Spoke Comforting Words, but I Saw Only the Frightening Aspects of the Euro-Crisis

Summary:  Although entertaining as gallows humor, last week’s statement by ECB President Mario Draghi illustrates important but seldom discussed aspects of the euro-crisis. Here we read and annotate the text.

It’s an oddity of our time that people tend to rely on secondary sources — journalists and pundits — to learn what the world’s leaders say.  Twenty years ago major papers, such as the New York Times, ran their speeches in full. Thanks to the Internet we can do so as well.  Here we do so for a major speech, with some information and analysis accompanying it to provide context.

The EU’s preferred policy solution


  1. An annotated speech by the President of the ECB
  2. They know what they want. They don’t see why their actions almost guarantee failure.
  3. They are relying on hope
  4. Other posts reporting Europe’s slow march to the cliff

(1) An annotated speech by the President of the ECB

In our world few things are as they seem to be. There are hidden complexities. There are hidden truths. There are lies and misrepresentations. Here we examine this important speech by a high european official, a speech which has electrified not just Europe, but investors around the world (mostly for wrong reasons). Draghi speaks candidly. But to correctly understand his words we must his orientation — described in the annotations.

Speech by Mario Draghi, President of the European Central Bank at the Global Investment Conference in London 26 July 2012

… I think the best thing I could do is to give you a candid assessment of how we view the euro situation from Frankfurt. And the first thing that came to mind was something that people said many years ago and then stopped saying it: The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does.

He refers to the widespread forecasts at its beginning by economists that the euro-system could not and would not work. For details see Can the European Monetary Union survive the next recession?, 11 July 2008. Next he explains the results to date of the euro experiment:

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.

Paul Krugman gives a more accurate explanation:

{W}e know pretty well why the bumblebee was able to fly: massive capital flows from the core to the periphery, which led to an inflationary boom in said periphery, and which therefore also allowed the German economy — which was in the doldrums in the late 1990s — to experience a big gain in competitiveness and hence a surge in its trade surplus without needing to go through painful deflation. This meant, in turn, modest inflation in the eurozone as a whole — slightly above 2 percent over 1999-2007.

Then Draghi puts the EMU in its proper context:

The bumblebee would have to graduate to a real bee. And that’s what it’s doing.

They built the EMU to act as a bridge moving Europe from individual nations to one State. It was a gamble against time, to achieve unification before its flaws emerged. And its working in terms of the metrics which Draghi considers important.

The first message I would like to send, is that the euro area is much, much stronger than people acknowledge today. Not only if you look over the last 10 years but also if you look at it now, you see that as far as inflation, employment, productivity, the euro area has done either like or better than US or Japan. Then the comparison becomes even more dramatic when we come to deficit and debt. The euro area has much lower deficit, much lower debt than these two countries. And also not less important, it has a balanced current account, no deficits, but it also has a degree of social cohesion that you wouldn’t find either in the other two countries. That is a very important ingredient for undertaking all the structural reforms that will actually graduate the bumblebee into a real bee.

These things are all true. American conservatives don’t just deny them, they lie about them. It’s important for their success that Americans remain ignorant about the successful aspects of Europe: stability, growth, lower income inequality, greater social mobility, and universal health care.  These things are even more pronounced in the Nordic nations than the EU itself.

The second point, the second message I would like to send today, is that progress has been extraordinary in the last six months. If you compare today the euro area member states with 6 months ago, you will see that the world is entirely different today, and for the better.  And this progress has taken different shapes.

At national level, because of course, while I was saying, while I was glorifying the merits of the euro, you were thinking “but that’s an average!”, and “in fact countries diverge so much within the euro area, that averages are not representative any longer, when the variance is so big”.  But I would say that over the last 6 months, this average, well the variances tend to decrease and countries tend to converge much more than they have done in many years – both at national level, in countries like Portugal, Ireland and countries that are not in the programme, like Spain and Italy.

Yes, in terms of the things a conservative values. Deficits, safety of property, protection of creditors, low taxes on the rich. Not so for many of Europe’s peoples. Do you see “variances decrease” in unemployment? Poverty?

From Wall Street Journal, 4 June 2012

Now we see what Draghi values, and how he measures social progress:

The progress in undertaking deficit control, structural reforms has been remarkable. And they will have to continue to do so. But the pace has been set and all the signals that we get is that they don’t relent, stop reforming themselves. It’s a complex process because for many years, very little was done – I will come to this in a moment. But a lot of progress has been done at supranational level. That’s why I always say that the last summit was a real success. The last summit was a real success because for the first time in many years, all the leaders of the 27 countries of Europe, including UK etc., said that the only way out of this present crisis is to have more Europe, not less Europe.

No mention of the social cost of this progress: poverty, lives ruined for the next generation:

Reuters, 2 May 2012

Then he returns our attention to the greater project: unification.

A Europe that is founded on four building blocks: a fiscal union, a financial union, an economic union and a political union. These blocks, in two words – we can continue discussing this later – mean that much more of what is national sovereignty is going to be exercised at supranational level, that common fiscal rules will bind government actions on the fiscal side.

Then in the banking union or financial markets union, we will have one supervisor for the whole euro area. And to show that there is full determination to move ahead and these are not just empty words, the European Commission will present a proposal for the supervisor in early September. So in a month. And I think I can say that works are quite advanced in this direction.

…  The second message is that there is more progress than it has been acknowledged.

But the third point I want to make is in a sense more political. When people talk about the fragility of the euro and the increasing fragility of the euro, and perhaps the crisis of the euro, very often non-euro area member states or leaders, underestimate the amount of political capital that is being invested in the euro. And so we view this, and I do not think we are unbiased observers, we think the euro is irreversible. And it’s not an empty word now, because I preceded saying exactly what actions have been made, are being made to make it irreversible.

But there is another message I want to tell you. Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

No mention of asking Europe’s peoples for their consent. They tried that with the European Constitution signed in October 2004. Two of the first four national referendums approved it (Spain, Luxemburg); voters in France and Spain rejected it — and it was rejected.  See Wikipedia for details on this history.  So Europe’s leaders rely on their power and reputation to achieve their goals, via the Treaty of Lisbon. Only Ireland’s people had the opportunity to vote; they rejected it in 2008 — and were pressured to approve it in 2009. See Wikipedia for details.

(2)  They know what they want. They don’t see why their actions almost guarantee failure.

In this speech Draghi explains the goals of Europe’s leaders (oversimplifying, they’re not one entity). They seek to protect their banks (and bankers). They seek to preserve the European Monetary Union, and continue progress to unification. Plus the third goal, usually in the shadows but stated clearly here: this crisis provides opportunity to break (“reform”) Europe’s social welfare systems. “Expansionary austerity” is an oxymoron in economic terms (as Krugman and so many other economists predicted), but accurate despite the politics. Austerity has expanded the power of Europe’s central State.

But the blindness of Europe’s leaders to the social costs — the human costs not even mentioned by Draghi, because they don’t show on a financial statement or in an economist’s model — might wreck the project. How long will the people of the periphery bear the deepening recession (depression for some, like Spain and Greece)? That remarkable social cohesion Draghi mentions (which has so astonished many of us) might not last much longer.

TV interviews after the crisis ends

(3)  They are relying on hope

So far the 1% (investors, and the managers of their wealth) have greeted every action by Europe’s elites with applause, and ignored the growing cracks in the structure. Rising unemployment, rising interest rates, lower ratings on Europe’s sovereign bonds, ever-stronger warnings from global institutions (eg, the IMF).  Both Europe’s elites and the world’s 1% have faith in the course steered by Europe’s elites.

At some point this becomes blind faith.  Every new conference concludes with Europe’s leaders in effect reading from Chapter 13 of Peter and Wendy (James Matthew Barrie, 1911):

Tinker Bell’s wings would scarcely carry her now, but in reply she alighted on Peter’s shoulder and gave his chin a loving bite. She whispered in his ear ‘You silly ass’; and then, tottering to her chamber, lay down on the bed.

His head almost filled the fourth wall of her little room as he knelt near her in distress. Every moment her light was growing fainter; and he knew that if it went out she would be no more. She liked his tears so much that she put out her beautiful finger and let them run over it. Her voice was so low that at first he could not make out what she said. Then he made it out. She was saying that she thought she could get well again if children believed in fairies.

Peter flung out his arms. There were no children there, and it was night-time; but he addressed all who might be dreaming of the Neverland, and who were therefore nearer to him than you think: boys and girls in their nighties, and naked papooses in their baskets hung from trees. ‘Do you believe?’ he cried.

Tink sat up in bed almost briskly to listen to her fate. She fancied she heard answers in the affirmative, and then again she wasn’t sure. ‘What do you think?’ she asked Peter.

‘If you believe,’ he shouted to them, ‘clap your hands; don’t let Tink die.’

Many clapped. Some didn’t. A few little beasts hissed. The clapping stopped suddenly; as if countless mothers had rushed to their nurseries to see what on earth was happening; but already Tink was saved. First her voice grew strong; then she popped out of bed; then she was flashing through the room more merry and impudent than ever. She never thought of thanking those who believed, but she would have liked to get at the ones who had hissed.

(3) Other posts reporting Europe’s slow march to the cliff

See the new FM Reference Page Europe – on the road to division or unification.

Some posts describing Europe’s drift towards a brink:

By David Einhorn, Greenlight Capital. Click to enlarge.
  1. The periphery of Europe – a flashpoint to the global economy, 8 February 2010
  2. About the Euro crisis: the experts are wrong; the German people are right., 7 May 2010
  3. Delusions about easy fixes for Europe, dreaming during the calm before the storm, 30 September 2011
  4. Is Europe primed for chaos, as it was in July 1914?, 7 October 2011
  5. Today Europe’s leaders took another step towards the edge of the cliff, 27 October 2011
  6. Where to from here, Europe? Some experts share their views., 8 November 2011
  7. Status report on Europe’s slow re-birth (first, the current system must die), 10 November 2011
  8. Looking ahead to see the new shape of Europe, 22 November 2011
  9. Europe passes the last exit. A great crisis lies ahead., 21 February 2012
  10. The Fate of Europe has become visible. Only how and when the break comes remains uncertain., 6 June 2012
  11. Europe has a political crisis. The economics are just symptoms., 11 July 2012
  12. The hidden goal of Europe’s leaders. See it and then their actions make sense., 27 July 2012

This post originally appeared at Fabius Maximus and is posted with permission.