The One Chart To Explain Why Draghi's Blunt Tool Can't Fix Europe

Tyler Durden's picture

The monetary policy transmission mechanism is broken in Europe; we all know it and even ECB head Draghi has admitted it (and is trying to solve it). As Bloomberg economist David Powell noted though, Draghi may have to address the economic fragmentation of the euro area before undoing the financial fragmentation of the region. The latter may just be a symptom of the former. The Taylor Rule, a policy guideline that models a monetary authority’s interest rate response to the paths of inflation and economic activity, highlights the drastically different monetary policies required across the various EU nations as a result of their variegated domestic economic conditions. This variation creates concerns over sustainability and the rational (not irrational as Draghi would have us believe) act of transferring deposits to 'safer' nations for fear of redenomination; and Draghi's bond-buying plan is unlikely to allay that fear anytime soon - as economies remain hugely divergent.


David Powell, Bloomberg: Draghi's Financial Fragmentation Fight Ignores Root Problem

Unemployment rates demonstrate the divergence of the region’s economies.




A Taylor Rule demonstrates the drastically different monetary policies required in those countries as a result of their domestic economic conditions. The model, based on coefficients estimated by the Federal Reserve Bank of San Francisco, signals the main policy rate should be minus 7.75 percent for Spain. It should be minus 3.75 percent for Portugal, minus 3.5 percent for Ireland and minus 10 percent for Greece. Germany is at the other end of the spectrum. It requires a main policy rate of 4.25 percent.



It appears broadly the Euro-zone rate is set 'fair' which means any rate cuts will be notably euro-zone inflationary - something Draghi wants to avoid.


Those economic divergences appear to have led depositors to question the sustainability of the monetary union in the absence of large-scale fiscal transfers to cushion the weakness in certain countries.


Savers may be transferring their funds to the banks of the creditor nations within the monetary union. Deposit growth in Finland jumped to 10.1 percent year over year in July. The figure for the Netherlands stood at 4.8 percent and that for Germany at 4.2 percent. Those transfers allow depositors to hedge – at no cost – the risk of redenomination of their savings into weaker domestic currencies. That behavior appears completely rational, as opposed to the “irrational fears” cited by the ECB president.


One of the basic principles of finance is an investor will always choose an investment with less risk than another if the levels of return are the same.

Draghi will probably have to convince market participants of the economic sustainability of the monetary union before the financial fragmentation of the region is ended. The OMT is a way to achieve a more focused 'easing' implcitly as QE does in the US at ZIRP - but the conditionality removes the mechanism for that benefit to flow. The large-scale extension of central bank credit to potentially insolvent countries is unlikely to accomplish that.



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diogeneslaertius's picture

The large-scale extension of central bank credit to potentially insolvent countries is unlikely to accomplish that.


vast-dom's picture

this chart also shows why the eurozone was stillborn from start.

Hype Alert's picture

In the meantime, the retirement accounts of 50,000 muppets were wiped out today.  Pension funds at 0 interest is a bitch.

Manthong's picture

What's that about an Outrageous Monetary Transactions program?

“the bank’s Governing Council agreed to buy unlimited amounts of the bonds of countries that meet certain stringent conditions for help. Spain, which is suffering from serious capital flight, is likely to be the first to seek aid under the awkwardly named Outright Monetary Transactions program.”

jtmo3's picture

You know, all this "can't", "won't" stuff sounds good, but these fuckers really do know what they're doing and have been doing it for years now. You think these guys don't have a clue their games won't work in the end? You think traders are so stupid they can't see through the games? This shit is gone to "extend and pretend" and they have a shitload more to go. You can plaster all the charts and commentators you want all over the web. But when you control the money, you can play a lot of games. This shits got a long time to go before "doom" sets in. Bank on it...pun intended.

Renewable Life's picture

Your right!!!!

But don't forget there is a cost to everything, oil, commodities, food, you name it, it will continue higher, the CB's don't have a magic oil machine or a fucking corn and wheat replicator in the basement!! Gold, silver, cooper, nickel, too

As they print, the debt doesn't go away, the fucking interest payments don't do down, they go up, and so will everything else, as it chases yield and speculation!!

I think people feel like kicking the can, or "extend and pretend" doesn't have an immediate cost, it does!!! Either the bank will break first or people will break first, it doesn't really matter, when you don't have anything to lose and everything to gain, you storm the Bastille!!! Until then we watch football!

laozi's picture

I like your style, stranger. Logical, yet easygoing prose without all this "been waiting for the crash but ...sob sob go up.. ". Keep on stacking!

AynRandFan's picture

Debt that never has to be repaid is debt that goes away.  Greece will never pay its debt but it will stay in the Eurozone.  Spain won't be able to repay much of its debt, and the maturity will be extended to infinity.  The ECB will get away with it, and the next time it will be worse.  Debt is imaginary.  Enforcement is impossible.

Cole Younger's picture

I have to agree..The shit is not going to hit the fan as many on this site (Tyler, Reggie, Phoenix, etc) has said. These fuckers are masters... and all this "it's going to collapse" crap is not going to occur..People, Banks, Governments, investors, etc. don't care if they print money out of thin matters not to anyone..This is the new monetary norm..It should collapse but it won't..I am starting to think Krugman is right..just fucking spend and who cares about the debt...The central banks are not going to allow any collapse of a big government and there is nothing to stop them from printing..The only thing that can stop the western central banks is China going to a gold standard and I doubt they will do it..They will have allot to lose...I know history and all that but history will not repeat..the central banks are not going to allow it to repeat..Look, the central banks are not going to allow a currency currency is all the central banks have..

Ned Zeppelin's picture

SHTF? Hardly any evidence for that just yet, only a grease spot on the floor where the 2008 debacle hit home and caused some big problems which TPTB have effectively (let's face it) papered over, but for now.  The pace of the tension has been increasing since then however - remember when problems in Europe were hinted at but not widely known? It wasn't that long ago.  And our own debt problem continues to mount.

What if the plan is to blow up the debt as high as possible. shift it to the sovereigns so as to enable collection by force through taxation (bankruptcy and liquidation of debt being such a bummer for creditors - think about why the Founding Fathers insisted on having bankruptcy in the federal constitution, as a right, as it were), and THEN HAVE US ALL PAY THIS BACK for generations? If so, the plan is well under way and doing very well.  That is why I like to say that as much as I understand the lure of PMS, for those who imagine there will be some sort of monetary event where they will come out afterwards and buy up city blocks with gold coins, well, that simply won't be allowed. Fiat will be enforced at gunpoint eventually. As for the debt, don't say, as many do, that it will never be paid - it's quite possible that the plan is that it will be paid, or else. 


AlphaDawg's picture

The shit has already started hitting the fan and will continue to get worse and worse as govs have way too much debt which cannot be paid back in parts of Europe, the UK, Japan and the US. Economies would crash if they even tried to curb spending to sustainable levels.


AlphaDawg's picture

Anyone who isnt investigating places to emmigrate to now is just childish and stupid

AynRandFan's picture

Apparently bond traders are lemmings that will buy anything, as long as someone promises to pay interest.  Who knew it was that easy to print money with absolutely no collateral?

Renewable Life's picture

I think if you break this down on strictly economic theory, you might be right, however people don't live and die in economic theory! They live and die in the real world, and when a man can no longer feed his children, support his family, and believe in tomorrow, whether it's in Syria or Los Angeles, shit will get dangerous!

So no, they can't print forever, they can't borrow forever without massive loses eventually coming home to roost! That's what this is all about, WHO is going to take the loses, the elite politicians, corporate CEOs and billionaires who made the bets and investments that go bad, or the taxpayers and citizens?? It looks like so far, the answer is.......the citizens! But when the citizens can give no more, they will rebel, this is human nature with a 5000 year track record!

JPM Hater001's picture

I think, though I could be wrong, that this is why central banks were bad and state soveriegnty is good.  If you suck you only suck to your people... so places where people do suck doesnt ruin our fun too...

Cognitive Dissonance's picture

"The One Chart To Explain Why Draghi's Blunt Tool Can't Fix Europe"

The dull blade cuts the deepest when it slips.

<The operation was a success doctor. Unfortunately we lost the patient.>

TruthInSunshine's picture

So you're saying that Bernanke & Draghi (if allowed) will successfully remove the malignant tumor that's begun to wrap around the left ventrical (prop up the banks/financials for a while longer), but the patient will die of massive internal bleeding and damage to cardiac tissue (kill the economy) in the process?


Cognitive Dissonance's picture

That's the plan Stan. Then it's out the back Jack.

"There must be 50 ways to create a New World Order."

TruthInSunshine's picture

So if Bernanke & Draghi are faux Doctors Moe & Larry, who's faux Doctor Curly?


The Three Stooges(Dizzy Doctors) 1937 full video
Winston Churchill's picture

Talking of blades,I was sure we had four scalpels Doctor.

Mr Lennon Hendrix's picture

The fact that Draghula is discussing the breakup of the euro means the breakup of the euro is nigh.  Either they will use some blind economic policy to buy bonds, or they will let it all go.

The can kicking seems endless but words without actons can only go so far.

Cognitive Dissonance's picture

They fully understand there will be some collateral damage when they let go. The Euro's demise has been well telegraphed to those who can, and will, protect themselves.

As for the plebs.........well, let them eat cake.

Cognitive Dissonance's picture

They have kindly agreed to let you call it whatever you want.

In fact they insist on it.

slaughterer's picture

All is good for Obama tonight:

stocks up

oil down

Europe saved

Bernanke waiting to print "if needed"

New Kindle

Nothing can go wrong.  


Vegetius's picture

Blunt Tool indeed

MFLTucson's picture

Doesnt matter, hisd plan was to run the market up for Obamas speach and that worked.

LMAOLORI's picture



+1 Like a charm we all know this is pure crap

"“But it is important not to confuse correlation with causation. Obama’s election chances and the S&P 500 are actually both being driven by the incoming news on the health of the economy,” he wrote."

in full

If S&P stays above 1,200, Obama re-elected: charts

pure crap

ADP August: +201k

Just when I thought the silly couldn't get any more so I get a report like this.

Employment in the U.S. nonfarm private business sector increased by 201,000 from July to August, on a seasonally adjusted basis.The estimated gain from June to July was revised up from the initial estimate of 163,000 to 173,000.

Did you catch it?

The first is a statement of change.

The second is an admission that the statement is not factual; it is an estimate.

I've always known that ADP estimates employment changes because they do not handle all of the payrolls -- they extrapolate to the entire economy from their customer data, which they actually have.  So their data is a count, but the extrapolation makes a number of assumptions, one of the most-important being that the ratio of firms using them to not is something they can adequately measure.

This is one of the many reasons their data is often wildly at odds with the NFP that comes out two days (or one, in the case of a holiday as was the case this month) later.

But -- did you know this?  If you didn't, now you do.

In any event you have to take notice of this number as it is wildly over expectations.  My best guess for tomorrow has to be ratcheted up to +125k as a consequence of it and the claims number this morning -- I was at +99k (just under 100k), so this is a fairly significant revision.

At the same time I want to note that effectively the entire gain in this report (92%) was in service jobs, and while our economy is about 70% service sector, this strongly implies that what's being created are "McJobs" that pay crap and have zero or few benefits -- that is, the common worker's standard of living is continuing its inevitable decline.

Ned Zeppelin's picture

Attribution - Market

LMAOLORI's picture



Yes sorry about that I assumed it was a clickable link and Karl has given permission to post his things in full

mccoyspace's picture

just crush everyone to the bottom then the one-size-fits-all euro dream works great.

LongSoupLine's picture

I'm fucking sick of this shit.


I love ZH, it's the best out there hands down.  Problem is, it's not "mainstream", meaning this shit today will continue and people are going to get fucked hard...again. 

My head hurts...time for some single malt.

Snakeeyes's picture

Like the use of the Taylor Rule. But how can the ECB strategy works when unemployment is growing to staggering levels?

Bastiat009's picture

Does anybody on earth sincerely believe that Draghi is trying to "fix Europe?"

Draghi works for Goldman .. you know the same Goldman that cooked Greece's books .. the Goldman that begged for AIG to get bailed out to get all the money that is was owed ... the Goldman behind marked to fantasy because market is for "muppets."

I am sure that some people at Goldman made a fortune today thanks to Draghi.

In the meantime, gold is up a massive 5 bucks and Spain's stock market is up 5%. Manipulation anyone?

slaughterer's picture

Grant and Santelli are correct: OMT is a virtual instrument that will probably never be used.  If Spain or Italy do not want to go the IMF bailout route, what makes anyone thing that they are going to submit to OMT conditonality?  This program is dead at start, and an arrogant, even outrageous insult to European democracy which will fuel a huge backlash in Central European media, let alone more efforts to block ESM.   

Scalaris's picture

Until the euphory-covered realism, of the still impaired, European economic-political structuralism, become news-cycle-worthy, once again, rejoice and enjoy the sweet nectar of centrally planned obfuscation, my docile, plebeian brethren. 

SmoothCoolSmoke's picture

Soooooo.  Today was another day when the "stupid, clueless, ever-long" muppets made a lot of money.  And all the "smart, in-the-know, its-all-ponzi" people lost a bunch of money.   Do I have this right?

laozi's picture

You are correct, unless the its-all-ponzi people were stacking gold, as they should.

Ned Zeppelin's picture

I called massive green across the screen the day before, and I still think it's a ponzi, dude.  Doesn't mean it's not. Just means you need to be respectul of the power of the CB Bully Pulpit. It is a formidable thing, not to mention when it is backed by printing presses.  But is it progress? Time will tell.  My bet is no.  You can't print away insolvency.  But apparently you can pretend to for quite a while. And I see diminishing returns coming - for instance, I predict we are back at the magic Dow 13k/S&P 1300 before too long - in fact, I'll venture that I'm proved right within 30 days - the shelf life of bullsh*t grows shorter each time.   There is no money in Europe to back all of this up.

Mark it.

slewie the pi-rat's picture

marioECB can't address the individual ecomonmies except monetarily

however, this does not mean that the monetary policies directed toward individual economies' debt and re-fi needs is a blunt tool

it doesn't seem to have been so far, at least to slewie

i'm not saying this will work or fail, just that the analysis is flawed in that it assumes "blunt tool" (which perhaps the "interest rate" is)

this also assumes broken monetary transmission;  this "seems" to be the case from data presented on zH

whatever one "assumes" these are the exact factors that the europeons will be facing as they "decide" how to proceed;  if they don't thing the ECB bankstering system can continue to function and they can't "fix it" they will probably...  do what?  end the EZ or "adjust it", it would seem to me

these possibilities and how they might develop have been discussed here on zH at length;  the "two-tiered" aka  the core & peripheral economies approach now a year or more old and probably being engineered as a possible critical path since then

critical path analysis is how the boomers dad's and moms but people on the moon using slide rules, land lines, and a few newfangled calculators

and invented the rogallo wing and hang gliding too!  The Genius of Rogallo's Wing - Skys The Limit 

The modern non-rigid kite started as a vision of Dr. Francis Rogallo, an aeronautical engineer of the National ...

what the banksters want and think they can do with the IMF (benzelbub just had a date w/ christineL while marioECB pretended to be "elsewhere" for propaganda purposes) remains to be seen

will they re-structure the EU and/or the EZ for "economic" purposes?

that would be up to them,  it seems to me;  i'm busy with a giant avacado and some little yellow tomatoes, myself...

LongSoupLine's picture

I love guac...made some last night.  Don't forget the lime to stave the browning.

Ned Zeppelin's picture

"Monetary policy transmission mechanism" - another favorite Bankerspeak label (add to the lexicon, like LIBOR "scandal" which serves to downplay the criminal aspect of the activity -  "Oooo it's so scandalous and salacious! My word  - pray tell what will those naughty bankers do next?" 

In other words, our ponzi pump don't work 'cause the vandals took the handle.

AynRandFan's picture

Economic activity will not increase in the Eurozone, debt will continue to be monetized, and unlimited liquidity will ultimately result in hyperinflation.  Until then, paper assets denominated in monetized currency will continue to appreciate.

Do you feel lucky?  Then try to jump out of paper assets at just the right time.

nathan1234's picture

The market has bought time for 5 days-  till 12th Sep.

The German court will in my opinion seal his big mouth.

Draghula (name- as seen from above) will have created a sell market now for a short time for his Goldielock Masters.



Wolf in the Wilds's picture

Draghi is playing the biggest bluff.  And I cannot see how this is a bazooka.