EC Insight Into The ECB

Investors, fellow central bankers, and the media continue to try to make sense of last week’s ECB surprise. We had argued that given the market positioning, especially the dramatic accumulation of speculative short euro positions since the middle of October, that the market was prone to a correction.  

The issue was really one of timing. Was it going to materialize after the ECB meeting or after the US jobs data? Or could it wait until after the FOMC meeting. This means that there was a reasonable chance of a recovery in the euro even if participants had not been disappointed by the ECB’s action.  

Former Luxembourg central banker, and now a member of the executive board of the ECB, Mersch provided some insight into what happened. His comments seem to be the most cogent comments. Earlier comments by Draghi and Austria’s Nowotny were too defensive, blaming the market entirely for misunderstanding.  

Mersch made several interesting points that should not be lost in the noise. Moreover, they may help investors understand how the ECB works and what to expect going forward. First, Mersch acknowledged that there was a leak from the ECB about the discussions of a two-tier deposit regime. He suggested that this was fueled expected that increased purchases. He was explicit. This proposal never had a chance. It was not even recommended by the working committee. Why not? Mersch says because it was clear that the Governing Council would have rejected it.  

This is important. It places reports that the ECB approved everything that Draghi asked for in a helpful context. The package of actions was crafted to ensure acceptance by an overwhelming majority. This suggests that despite the rotating voting mechanism, that a consensus is still sought. Unlike former BOE Governor King, who was repeatedly outvoted by the MPC, Draghi forges a majority. 

Before Draghi was given the reins of the ECB, a German magazine recalled that he was affectionately referred to as the Prussian Roman. While that moniker may have been dropped, Draghi appears to take to heart the observations by Bismark that politics is the art of the possible.