Bad that such speeches are hardly covered by media.
Jörg Asmussen of ECB explains the challenges faced by Eurozone policymakers.
He begins quoting Paul Samuelson that central banking is the third greatest invention of mankind:
It has been said that “there have been three great inventions since the beginning of time: fire, the wheel, and central banking [1] ”. Central banking has become my business since January this year, but I feel I am getting my fair share of the other two as well: being behind the steering wheel of the ECB during this crisis turned out to be in the line of fire.
The quote was actually requoted by Samuelson. Will Rogers, American humorist seems to have first said this. I am sure it was just in humor 🙂 This would be used by me for many future articles. It has few interesting perspectives to it…
He looks at three communication issues:
The crisis was a game-changer in the communication of central banks, and of economic policy makers more generally. In this world of unknown unknowns, and rapid shifts market sentiment, our task has become much more complex. The new challenges can be captured by the following three themes, or fault lines:
- First: market communication versus political communication;
- Second: transmitting the message versus facing the discourse
- Third: arguing with counterfactuals and navigating the short versus the long term
On the first one, he says politicians mean something else but markets interpret it completely differently:
The importance of the consistency of the messages across time, countries and media outlets remains. But the context has changed fundamentally. During this crisis, central bankers and policy-makers are faced with a potentially explosive interplay between markets and politics. Messages that are necessary and legitimate in public debates can be completely unsuited for market communication and exacerbate tensions.
Let me explain. In Spring 2010, Angela Merkel addressed the German Bundestag to persuade lawmakers to approve the financial assistance programme for Greece. She had to engage in a profoundly political discourse. She employed all tools of rhetoric. And she justified her appeal by declaring that “the future of the euro is at stake”. This was legitimate.
However, in financial markets across the globe, that very same message popped up on traders’ screens as a one-liner: “Merkel questions survival of single currency”. If you were a trader, what would you do? The rest is history.
One and the same message is received very differently by different audiences. But those audiences cannot be separated easily. “Political” communication and the processing of this information in nervous and fragile markets has been a major factor that exacerbated and propagated the crisis.
Within Eurozone, there are additional concerns:
Adding complexity to an already complex situation is the fact that the ECB communicates in a multi-lingual, multicultural context. One and the same message, even if translated perfectly into the 23 official EU languages, may cause very different public and market reactions.
On second issue, thanks to internet we have so many experts:
The globalisation of information, the rise of the internet and the new “prominence” of central bank action create a new context: whatever the central bank does is subject to a worldwide market assessment and media commentary.
In blogs and internet comments, via Twitter, on TV channels and in traditional print media, central banks are faced with a barrage of outside opinion that has a powerful impact on public discourse. Professors, Nobel Prize winners, analysts, chief economists, innumerable experts, any individual posting comments on the internet: they all present their analysis and opinion.
In many cases, there is thoughtful analysis. In some cases, opinionated polemics. But in almost all cases, they know better. The concepts they use, the solutions they propose and the policy actions they call for – all this shapes the public discourse, and one way or another also influences policy-makers.
The difference is that commentators do not need to assume the responsibility for the recommended actions. Policy-makers have to.
An example:
Let me give you an example: last year, a debate was raging about the size of the European financial assistance facilities, the so-called “Eurozone firewall”. None of the very substantial amounts seemed to be enough: the 500 billion euro that were already on the table, and used to only a very small extent, were decried as insufficient. One trillion euro at least, if not two trillion or more, were seen as necessary.
One idea pushed forcefully by the “international expert opinion” was to “leverage” existing funds, by offering incentives to private and public entities to provide additional funds. And indeed, throngs of European officials worked night and day to devise and agree on two options to leverage the European Financial Stability Facility (EFSF). Today the two instruments are there. They could work. Will they ever be used? The caravan of the “commentariat” had already moved on. No-one speaks about leveraging the EFSF anymore. In fact, the actual investors in EFSF bonds were put off by the leveraging options, because it made the EFSF structure more risky and less understandable.
The searchlight of attention of the markets and the commentary shifts fast. Yesterday it was the firewalls. Then it was growth. Today it is Spain. For sure, all of these issues require action. But designing and agreeing on responses takes time. No wonder that policy-makers are criticised for constantly being “behind the curve”.
As most discourse happens outside Europe, it just builds chaos:
Why am I telling you this? Because it sheds light on the nexus between a new class of opinion formers, financial markets and policy outcomes.
For the euro area and the ECB, the situation is even more peculiar, because the influential “commentariat” comes predominantly from outside the euro area. The big English-language newspapers, the news agencies and wire services that shape opinions in the economic and financial sphere on the Continent are all writing from outside the euro area. There is, of course, nothing wrong with friendly outside advice. And I certainly do not wish to come across as whining and complaining.
But it simply remains a fact: the analysis, discourse and policy prescriptions that are propagated come from the outside. Maybe inevitably, they come with a certain disinterested detachment. As if the outside “spectators” are not affected by what is happening.
And they come with a dangerously narrow and exclusive perspective on the economics of the monetary union. But if the profound political commitment of Eurozone countries to the historical project of “ever closer union” is neglected, the assessment remains superficial and partial. And the suggested policy responses may be biased or naïve.
Why does it matter? Because the discourse influences some of the most important financial markets for the Eurozone. If expectations that have been built up are not fulfilled, if alleged certainties do not materialise, if actions from politicians or central bankers are not forthcoming as anticipated by the “market consensus”, the reaction can be grave: volatility, contagion, all the way to complete market dysfunction. The systemic impact can be major, driving financial institutions, as well as sovereign borrowers into real difficulties.
He looks at the communication challenges for addressing short-term and long term issues as well.
In the end, he seems to believe that c-banks are the third best inventions in history:
The crisis was a game changer in the communication of central banks. Navigating between markets and politics has shifted the goalposts of the ECB’s communication. We are facing up to this new environment and its challenges. We are engaging more. We are explaining more.
The changed environment, including the spread of new media, might actually be an opportunity in this respect. That said, I would not expect every member of the ECB Governing Council to open a twitter account soon or to accept you as friends on Facebook.
Let me close with a word of caution. The ECB has gained stature during this crisis. The people and the markets look to the ECB for solutions. But there should be no illusion that the ECB can single-handedly ensure a plain sailing for our economies and the markets. There are limits of what we can do, and what we know. “Central banks do not have divine wisdom. They try to do the best analysis they can and must be prepared to stand or fall by the quality of that analysis [9] .”
Rest assured that we will continue to do this, and to fulfil our mandate. Not least to make sure that central banking remains up there in the list of the three greatest inventions.
I think he also means this in good humor…:-)
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