"Where is the implementation?"

A couple of weeks ago I wrote a post about the first press conference of Mr. Mario Draghi as president of the ECB and I entitled it "A tranquil messenger of continuity". The word "continuity" reappeared yesterday in the title of Mr. Draghi's introductory remarks at the 21st Frankfurt European Banking Congress.

In his remarks, he did not deviate a millimeter from his initial message. The ECB is aware of the current stress in the funding markets, in essence he says, but it is doing what it legally can. Draghi will not risk losing the credibility of the ECB by embarking on stealth fiscal policy. Read below the key passage, implicitly directed to those who demand from the ECB a full scale monetization of the sovereign debt of Italy and Spain:

Let me use this occasion to dwell a bit further on monetary policy in the current environment. Three principles are of the essence: continuity, consistency and credibility.

Continuity first and foremost refers to our primary objective of maintaining price stability over the medium term.

Consistency means to act in line with our primary objective and with our strategy both in time and over time.

Credibility implies that our monetary policy is successful in anchoring inflation expectations over the medium and longer term. This is the major contribution we can make in support of sustainable growth, employment creation and financial stability. And we are making this contribution in full independence.

 

Gaining credibility is a long and laborious process. Maintaining it is a permanent challenge. But losing credibility can happen quickly – and history shows that regaining it has huge economic and social costs.

These three principles – continuity, consistency and credibility – are at the root of the Governing Council’s outstanding record during the past 13 years in terms of price stability and anchoring inflation expectations. 

What is most relevant to the current crisis: "anchoring inflations expectations is the major contribution the ECB can make in support of financial stability." Those who expect and demand more, will be disapointed.

You can almost sense a heroic stance in his thinking. It is a virtue to resist the calls for unlimited and aggressive financing of European governments, because he is defending a hard-won asset: the credibility of the Central Bank. For this man, it will be a deep personal failure to give in in this issue. My guess is that he would step down first from the presidency. From his point of view, he is doing his part while others aren't:

We are more than one and a half years after the summit that launched the EFSF as part of a financial support package amounting to 750 billion euros or one trillion dollars; we are four months after the summit that decided to make the full EFSF guarantee volume available; and we are four weeks after the summit that agreed on leveraging of the resources by a factor of up to four or five and that declared the EFSF would be fully operational and that all its tools will be used in an effective way to ensure financial stability in the euro area. Where is the implementation of these long-standing decisions?

UPDATE: Krugman has read the same speech and, predictably, is furious. He cannot understand why the ECB refuses itself from the role of lender of last resort in face of a self-fulfilling crisis of confidence in the Eurosystem. I believe this criticism would be fair if directed to a national central bank. The ECB, on the other hand, is only a piece in game between different nation-states.