The smoke signals coming of the European Central Bank meeting indicate that the boys from Goldman Sachs – Italian Prime Minister Mario Monti and ECB chief Mario Draghi have achieved an incredible win. The Bundesbank has been routed.
The global share markets last night were nervous that these signals were really true. But European bond traders, who have a more attuned ECB sniffer, believed the signals and began buying high yielding Spanish and Italian bonds and were very nervous about the low German bond yields which may be unsustainable. We will know tomorrow night whether the smoke signals are correct.
In essence, the smoke signals suggest that Mario Draghi and his European Central Bank would under take a campaign to buy unlimited amounts of Spanish and Italian bonds to keep yields at a specified maximum level. To gain that status, both Italy and Spain have to undertake major reforms. For the most part Italy’s Mario Monti has done the reform job.
Spain needs much more work on its labour laws and austerity measures.
German Chancellor Angela Merkel who in the earlier European leaders’ meeting buckled to the threats of Italy to leave the euro, is in Spain talking with Prime Minister Mariano Rajoy. She would have made it very clear what will be required from Spain to get this bond support. But she did not need to. Mariano Rajoy is a friend of Italy’s Mario Monti and both men know that bad labour laws lead to high unemployment -- particularly among the young. Monti has apologised to the youth of Italy for the bad Italian laws that caused so much suffering.
In this context is important to read Oliver Marc Hartwich’s column this week, which explains why there is a resurgence in Spanish support for the Euro -- it is the only way the changes can be made.
What is happening in Europe should be linked to events in the US and China (Unleashing the stimulus beast, September 4). The smoke signals have not spelt out the details but the so called troika – the European Commission, the International Monetary Fund, and the European Central Bank – meet in Athens this week to tell the Greeks that unless they change their restrictive labour laws there may be no more bail out money.
The troika says the Greek government must drive through labour laws to make workplace conditions and working hours far more flexible and that the notice period before firing a worker is to be slashed and severance packages reduced.
The Australian government wants to become part of Europe on carbon rules, Maybe we should do the same thing in labour laws. I am joking.