A few questions for Draghi today

A jumbled bunch of questions I’ve had on my mind for a while split roughly into three categories: Structure of the Eurozone, Monetary policy, Operational.

Of course I don’t expect any of them to be answered, but I had fun writing and I hope you have fun reading.

Structure of the Eurozone

(1) To what extent do you agree with President Juncker that “Without Schengen and the free movement of workers, of citizens, the euro makes no sense”? How intimate is link between Schengen, the euro and the single market? If a country was to unilaterally leave Schengen, would it have to consider its membership of the Eurozone?

(2) In a speech last week Benoît Cœuré concluded that further integration along the lines of the Five Presidents’ Report is not possible without first completing the significant (but already underway) external and internal rebalancing of the Eurozone. Do you agree? If so, does that make plans for a euro-area wide deposit insurance scheme premature?

(3) Last week Peter Praet said “sovereign debt is not a risk-free asset”. To what extent do you believe the Eurozone sovereign debt market has confidence in that statement? Do markets still price a likelihood of institutional activism based on a belief a sovereign default would trigger widespread contagion? [A significant amount of sovereign debt is still held by national banks.] What institutional reform is still necessary to prevent such market perception and move the Eurozone sovereign debt market towards credit fundamentals?

(4) In October you said, in regards to Greek exit from the Eurozone: “As far as the ECB is concerned, it was never on the table. I think we have demonstrated that consistently in the past, no matter what others have said or were said to have been saying.” Yet on 29 June, one of your Executive Board, Benoît Cœuré, said “Greece exiting the euro area, which used to be theoretical, can unfortunately no longer be ruled out.” Was Benoît Cœuré wrong to make that statement in June?

(5) At the end of last month Vitor Constancio rejected the claim that ECB has “continually gained more power and become a political player” in recent years. This was only a few weeks after Euroactiv reported you busted a political stalemate over deposit insurance at the European Council meeting — if that’s not political power, what is?

(6) Can you envision a Capital Markets Union — like the UK Government is advocating — supervised by national institutions, without common supervision at its core? Can the Capital Markets Union project be successful without harmonisation of bankruptcy law, company law and taxation of financial products?

(7) Should the European Parliament ECON Committee have the legal power to subpoena documents from the ECB, in the same way the equivalent Congressional committees can from the Federal Reserve?

(8) The demographic data says Europe is an ageing, conservative society. What is the incentive for this society to risk backing the revolution in governance you say Europe needs? How will you overcome this force of status quo? And if you can’t, what does this mean for the Eurozone?

(9)

“They also pointed out that alternative forms of investment (energy, infrastructure, etc.) would be suitable for long-term institutional investors. There was significant potential to unlock investment — and thus growth — in the euro area, but several issues needed to be addressed in a number of euro area countries, such as the enforceability of contracts, the protection of minority investors’ rights and the resolution of insolvency.”

—Institutional Investor Dialogue, 18th November. Irrespective of the ECB’s monetary policy stance, will euro-area investment recover without significant reform of insolvency regimes in the periphery? [Which appears not to be forthcoming.]

(10) In October Mark Carney said “It is desirable, particularly given the weight of the ECB and of the members of the single currency within the EU, that there are clear principles to safeguard the interests of non-euro member states.” Is this a reasonable request, to be enshrined in the Treaty?

(11) According to the October ECB Bank Lending Survey, the Asset Purchase Programme (APP) had led to a reduction in euro-area sovereign bond holdings at only 7% of (surveyed) Eurozone banks in preceding six months. Is the sovereign-bank nexus ever going to be broken?

(12) In October you said: “I am certainly not suggesting that the path followed by Europe to manage them is replicable at a global level. But the experience we have gathered, the experimentation with supranationalism, the failures and the successes, all carry invaluable information for those involved in managing global issues.” Given it is Davos week, can you give us some concrete examples?

(13) To what extent do you think broad public support for the euro is underpinned by “positive” factors (European identity, protection against risk of exchange rate crisis,…) versus the “negative” one—the sheer complexity of breaking it up?

Monetary Policy

(14) On December 4th you said “the risk of deflation in the Eurozone is firmly off the table”. Yet just last week, your chief economist said “playing down the risk of deflation would be negligent”. Has the situation changed so materially in the intermediary period or is there disagreement among the Governing Council?

(15) It was said in the December Governing Council meeting accounts that “the possibility was mentioned that oil prices could turn out to be lower than expected” in the December staff forecasts—obviously this has materialised. With the ECB’s model showing that oil at ~$30/barrel would almost certainly lead to negative headline HICP in the near-term, how did that colour the debate in the Governing Council meeting today? Short of a significant rebound in the next three weeks before the assumptions for the March staff forecasts are fixed, to what extent do you expect to be able to “look through” these developments come March?

(16) Why was a detailed inflation risk assessment omitted from the December Governing Council statement, in contrast to all previous statements in 2015?

(17) In 2015 the ECB’s active covered bond purchase programme (CBPP3) faced operational constraints buying in the secondary market because of subdued liquidity. So given recent widespread reports of subdued liquidity in the euro-denominated secondary supranational, sovereign and agency debt markets, coupled with data from this week’s SESFOD survey [see below] that dealer market-making activity will decrease further in 2016, is there any risk the public sector purchase programme (PSPP) will face similar operational constraints in the near future? If so, to what extent will reverse auctions be able to rectify this?

(18) The ECB’s strategy of using OWICs to buy asset backed securities (ABS) hasn’t delivered a positive impact on the pace of ABSPP purchases since the strategy was reported to have begun in October. Is the ECB looking at any other strategies to increase the pace of ABS purchases? Are you disappointed that the ABSPP has failed to revive SME-backed ABS issuance in any meaningful way?

(19) Do you agree with Christian Noyer that “The reaction function of central banks should be symmetric.. and also be perceived to be symmetric”? (19A) Do you think there is wide public perception that the ECB reaction function is symmetric given it’s asymmetric around 2%? (19B) Unless the APP is an adequate substitute for interest rate stimulus—which the ECB’s own research shows it is not—surely the zero lower bound makes your reaction function inherently asymmetric?

(20) Why does the ECB not publish interest rate forecasts of members of the Governing Council in a similar fashion to the FOMC? Would that not enhance forward guidance?

(21) December saw the second straight monthly fall in Eurozone service-price information. Why?

(22) How independent is the editorial process of the accounts of the Governing Council monetary policy meetings? Do the Executive Board sign them off? How do you ensure the accounts are not biased towards the communication preference of the Executive Board, rather than reflect the fullness of the discussion of the whole Governing Council? Would a summary of an exchange, for example, ever be removed if it was felt not to comply with a communication preference of the Executive Board?

(23) Why has there been no technical detail yet published yet about the December Governing Council decision to reinvest APP principal? It leaves analysts unable to make properly estimate the monetary policy impact of the measure. Given you said this policy was part of the package of measures the Executive Board proposed before Governing Council debate, surely the technical detail had already been prepared by the Eurosystem committees? Furthermore, it left journalists unable to scrutinise you on the details of the policy at the December press conference.

(24) In September you shrugged off a Parliamentary question about the eventual exit strategic from APP as a “high-class problem”. But now that the Governing Council have guided on principal reinvestment at the end of the programme, this seems unfair. Indeed, a week after you dismissed the question, Peter Paret said: “For one thing, rate increases will have to be carefully aligned with the normalisation of central bank balance sheets. There will be some division of tasks between instruments to be thought through and organised: what portion of accommodation can be removed — quite conventionally — by raising short-term rates, and what portion by active management of portfolios, i.e. by applying controlled pressure on long-term rates. The profile and evolution of short-term rates and the shape of the term structure will probably look different than in previous normalisation cycles.” The Bank of England recently guided it will only start unwinding its QE asset purchases from its balance sheet when rates hit 2%— is it likely the ECB will use the same strategy? Will the reinvestment policy be undertaken without prejudice of how the APP is phased out? If so, does that mean that the ECB could continue to buy, at a slower pace, on top of reinvestments of maturing bonds?

(25) In several recent speeches Governing Council members (including yourself) have left out “but below” in the definition of the ECB’s mandate — was this intentional?

(26) Does it concern you that a majority of economists recently surveyed by Reuters answered “No” to the question “Is the ECB in control of inflation in the euro area?”

(27) In his 2015 Jackson Hole speech Vitor Constâncio said, in respect of the ECB’s inflation forecasting model: “The steepening of the Phillips curve also helps improve its ability to fit the low inflation episode, together with the use of measures that indicate wider negative slack and short- to medium-term survey inflation expectations.” Is it likely the ECB will incorporate this change into its models in the near future?

(28) In November Benoît Cœuré said: “If every economy were to react to their domestic challenges by exporting their slack, it would only trigger a race to the bottom.” To what extent is exporting slack part of the ECB’s monetary policy strategy?

(29) In November Peter Praet said: “…we have seen, on occasions, longer-term inflation expectations responding to short-term movements in oil prices. That is unacceptable for a central bank, insofar as it implies that people’s expectations of its reaction function have become less certain.” Could an alternative explanation for this not be people’s faith in the ability of the ECB to meet mandate with its available toolkit?

(30) According to the October ECB Bank Lending Survey, 19% of (surveyed) Eurozone bank have used additional liquidity arising from euro-denominated assets the ECB have purchased from them to “buy non-euro area marketable assets” [see below]. Is this external capital flight a concern?And what about the recently released Target2 data that shows evidence of APP led internal capital flight from the periphery to the core?

(31) Do you agree with Charles Engel on the desirability of “an agreement [between central banks] to modify, to some extent, excessive currency fluctuations”? [see below]

(32) In October you said that APP has “surpassed expectations”. Do you still believe that? And if so, why is the market so fundamentally mispricing Eurozone inflation compensation?

(33) The Eurozone ended 2015 smaller in real terms than at the start of 2008. On the ECB’s own projection Eurozone GDP will have been flat for a whole decade on per capita terms. What do you rate your chances of having created nominal GDP escape velocity — and a situation where the Eurozone is in a position to shrink debt and create jobs—by the end of your term in 2019?

Operational (inc SSM)

(34) How much confidence do you have in China’s official statistics?

(35) On December 5th Reuters reported, in respect of the Eurosystem committee review you announced in October, “Opponents worked to curtail proposals coming out of the ECB’s committees that prepared the decisions, ensuring that some of the more radical measures expected by market players never made it onto the table.” If the Executive Board cannot rely on Eurosystem committees to produce full, frank, evidence-based proposals to consider, who can they? It is surely damaging for ECB credibility if technocratic Eurosystem committees are seen to be riddled with politics?

(36) The Federal Reserve publishes the code behind its primary forecasting model (FRB/US). The New York Fed does the same (FRBNY). In April 2014 you said: “A transparent central bank is not only more accountable, but also more effective in implementing its monetary policy. If the general public and financial markets can understand how the ECB is likely to respond in a given situation — its so-called “reaction function” — they can form reasonable expectations about future monetary policy.” Surely this would be consistent with opening up some of the ECB’s own macroeconomic forecasting code?

(37) What historical record of today’s Governing Council will eventually be released? Decision ECB/2004/3 says the ECB can only refuse public access to documents for a “maximum period of 30 years”. The ECB archives contain only the agendas and [not very comprehensive] minutes of the pre-ECB Committee of Governors meetings — not transcripts. Given the historical importance of the ECB’s Governing Council meetings, will full transcripts of meetings eventually be released?

(38) The SSM has given no explanation why it didn’t release the results data of the Novo Banco comprehensive assessment in October 2015. There is no data from earnings releases. How can the Portuguese public independently verify if the Government sold the bank for a fair price if there will be no understanding of what was sold?

(39) Why does the SSM still keep so much data under wraps relative to the Federal Reserve? Weekly data on assets and liabilities of its supervised banks, for example.

(40) On Sunday Reuters reported “The European Central Bank is quizzing a number of euro zone banks about their high levels of non-performing loans” Why does the SSM not already have a comprehensive understanding of non-performing loans at its supervised banks?

(41) Erste Bank’s CEO, Andreas Treichl, recently said he believes central banks in some EU countries are not independent. Does it worry you that such a senior figure in the banking sector thinks this? [see Q10]

(42) In September a tender document was published that revealed the ECB has hired six bluechip management consultancy firms to “help the ECB meet its organisational challenges of the coming years”. What triggered such a fundamental organisational overhaul? Why could the ECB not hire the talent it required? Will data on the cost of the contract be published?

(43) Has there been an effort to expand the new communication guidelines beyond just the Executive Board to other members of the Governing Council? Sensitive monetary policy remarks made in the “quiet period” this week by members of constituent Eurosystem national central banks have confused even seasoned ECB analysts.

(44) Why is your communications department consistently failing to put Governing Council speeches/interviews up on the ECB website at the time of delivery/publication, even after the new communication rules came into force? When this happens it gives a considerable advantage to market participants who are in the room or have a subscription to a particular media outlet.

(45) On December 14th you spoke at the 40th anniversary of the market data firm “Prometia”. Prior to the event they splashed your image on their website [see below], and afterwards have used your speaking in promotional literature. The new communication guidelines, published two months before the event, state that Executive Board members should “strive to ensure, in selecting their speaking engagements, that the acceptance of such invitations is not perceived as giving the organiser a prestige advantage over a competitor or allowing them to benefit financially from apparently exclusive contacts with the members of the Executive Board”. Some may argue this speaking engagement was in violation of that principle?

(46) The new communication guidelines it states “…two-way communication is based on open, transparent and regular dialogues and debates between the Executive Board members and the public as well as specialised audiences.” When was the last time you (or any member of Executive Board) took a question from a member of the general public? [Whether or not Executive Board members should engage in “regular dialogues and debates” with public is debatable itself. But they definitely don’t at present, so to claim they do in the communication guidelines is misleading.]

(47) Is the ECB doing enough to “promote cultural awareness and European diversity”?

(48)

“The Governing Council of the European Central Bank has decided that national central banks will from now on have the option to communicate publicly about the provision of Emergency Liquidity Assistance (ELA) to the banks in their country, in cases where they deem that such communication is necessary.”

—Communication on Emergency Liquidity Assistance, September 16th. Problem is, would a national central bank want to be transparent if an ELA request was turned down by ECB? How does that assist transparency?