One of the biggest wildcards for 2015 has been whether or not the ECB would proceed with US-style, "public debt" QE (considering the private QE has gone absolutely nowhere fast with just €21.5 billion in ABS and covered bonds monetized in the past few months) over both the objections of Germany and, increasingly, the ECB's governing council itself. Recall that it was just last week when Germany's Die Welt reported that, in a stunning turn of events, Draghi lost the majority vote on the ECB executive board when Benoit Coeure joined Sabine Lautenschlager and Yves Mersch in the "no" camp.
Today things for the former Goldman banker went from bad to worse, when as the FT reports, the ECB lost its "normal political cover" to make a bold decision, in fact the boldest decision in the ECB's history: one which could lead to a political and legal retaliation by Germany itself. The reason, as FT's Peter Spiegel explains, is that unlike previously when EU summits resulted in "greenlighting" blueprints which, if only on paper, enabled Draghi to proceed unconstrained, this time there was no such blank check compact.
Back in October at a eurozone summit, Draghi was able to get a little-noticed statement out of the assembled leaders committing them to another “Four Presidents Report”, a reference to the blueprint delivered in 2012 that set a path towards further centralisation of eurozone economic policy. The report helped kick-start the EU’s just-completed “banking union.”
Progress on that 2012 blueprint has since stalled, however, and at his last summit press conference, then-European Council president Herman Van Rompuy said the new “Four Presidents Report” would be delivered at the December EU summit, which starts next Thursday. Many in Brussels saw this as the quid for Draghi’s quo – once the leaders agreed to another blueprint for eurozone integration, Draghi would have a free hand to launch QE.
But according to a leaked draft of the communiqué for next week’s summit, Draghi may have to deliver his quo without a eurozone quid. The text makes clear that leaders have no intention of delivering a new blueprint any time soon.
What's worse is that instead of merely leaving the bogey hanging, the draft actually put a time-period on the political limbo that the ECB will suddenly find itself under: "According to the draft, a debate on how to proceed will be pushed off until February, and the report itself will come no sooner than June. Here’s the relevant paragraph from the current draft, sent around to national capitals on Monday:"
Closer coordination of economic policies is essential to ensure the smooth functioning of Economic and Monetary Union. Work on the development of concrete mechanisms for stronger economic policy coordination, convergence and solidarity is being taken forward. Heads of State or Government will exchange views on these matters at their informal meeting in February. The President of the Commission, in close cooperation with the President of the Euro Summit, the President of the Eurogroup and the President of the European Central Bank, will report at the latest to the June 2015 European Council.
The bottom line, as Spiegel concludes, is that "Draghi won’t have the normal political cover he needs to make a bold decision early next year – a problem only compounded by the European Commission’s decision last month to put off the day of reckoning for France and Italy over whether they will face sanctions for failing to live up to the EU’s crisis-era budget rules."
So with every bank praying to their Keynesian gods, and, of course, the ECB's money printer which will be oh so very critical with the Fed out - at least indefinitely - did the world's capital markets just get the worst possible news, namely that at least until the summer of 2015 the world will be reliant only on Japan's Abenomics, which as most already know, has succeeded in only pushing Japan into a near-depressionary quadruple dip, and where the political capital of the prime minister can now be counted on one hand.
And with the ECB's hands tied, what happens to the world's biggest equity bubble if and when Japan's population finally realizes it has had enough of unprecedented inflation coupled with wage deflation, and gets rid of Abe for the second and final time? Suddenly, what seemed like a distantly hypothetical "worst-case" scenario is looking all too realistic.