Richard North, 07/08/2012  

Draghi dug-771.jpg

Things are getting more interesting, with an intervention from Ambrose in his piece yesterday. He seems to think that the Draghi initiative is real. Thus, his narrative has Draghi teamed up with Mario Monti to produce a "cunning masterplan" which shows signs of rescuing the ailing euro, for the time being. But can this really be so?

In assessing what is really going on, it might help to remind ourselves that Draghi is president of an EU institution – for such is the ECB. He is also one of the quartet of EU presidents charged with coming up with a treaty masterplan for the next European Council. One should also recall that Monti is a former EU commissioner.

Neither of these two things are mentioned by Ambrose, although they might be relevant when one tries to analyse a series of events dominated by theatre, where "smoke and mirrors" are the order of the day.

Nevertheless, in constructing the "Draghi Plan", we are told that, tactically, Draghi has "pulled off a master-stroke", leaving the Bundesbank's Jens Weidmann "isolated", with the Dutch and Finnish governors backing the ECB president.

According to this scenario, even Germany's member on the ECB's executive board, Jörg Asmussen, has lost patience with "the ideological preening of the Bundesbank" and, despite its objections, Draghi has secured a mandate for "unlimited open-market operations".

Ambrose could, of course, be right. Die Welt was reporting at the end of July that Draghi had secured an "inexhaustible source of money" to bail out the "crisis states", which means, in the Ambrose scenario that "the ECB at last has a licence to act with overwhelming force, like the US Federal Reserve".

What troubles me though is the implication that Asmussen has suddenly turned. From his performance in Riga in June, it has been long evident that the German ECB member has gone over to the dark side, telling all and sundry that: "We need a more integrated monetary union, because the monetary area that we have now is incomplete".

On the other hand, the idea that Jens Weidmann is "isolated" is dubious. With Germany paying 27 percent of any bailout funds, if the Bundesbank blocks the funding, Draghi has nowhere to go. When you have the lion's share of the money, you can never be truly isolated.

It also helps if you know that there is a major turf war being played out between the ECB and the Bundesbank, with both sides briefing against each other – another thing that Ambrose does not mention.

But, in truth, neither of these major players can be trusted to deliver the truth, much less the whole truth, and especially the ECB, which has never disclosed the source of its "inexhaustible" funds.

Turning to Monti, we see from Handelsblatt that the financial situation has deteriorated so rapidly in his country that the bond yields have soared above six percent and many banks fear an imminent bankruptcy.

It stands to reason, therefore, that Monti will be doing his best to lock in a rescue plan that he can live with, at the same time reassuring the markets that the situation is under control. He will also be wanting to ramp up the pressure for a quick settlement, as indeed he is doing.

Having warned in Helsinki that we would soon see a "eurosceptic government taking power in Italy" (meaning a victory for Berlusconi) if the current "farce" goes on, he has also been warning of a "potential breakup" of the EU. "The tensions that have accompanied the eurozone in the past years are already showing signs of a psychological dissolution of Europe", he told Der Spiegel over the weekend.

Then there is Spain. With the potential to bring down the whole of the eurozone, this country must be brought into line, which means that Spain's Mariano Rajoy must commit to a humiliating request for a formal bailout. Much of the recent rhetoric, therefore, will be directed at pressuring Rajoy into action.

Such nuances, though, are not entertained by Ambrose. He argues that the two Marios have pulled off a feat of statecraft and have wrested control of the ECB from Gold Standard zealots. The ECB, he says, is preparing to act as a genuine lender-of-last-resort for the first time.

For myself, I would be less confident about distinguishing between the theatre and reality. There are far too many imponderables, in my view, to reach any definitive conclusion about what is happening.

What this does show up though is the one thing about which there is no dispute. This is indeed a fiendishly complicated game of diplomatic chess. And it is made even more complicated by the fact that the rules are not declared and, most likely, the different players are working to different sets of rules.

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