Sliding Doors: what if Draghi had never been there at all?

 

SLIDING DOORS

Mario Draghi is rumored of becoming the new Italian Prime Minister. But what if we never had a Draghi at all?

Frankfurt, January 4^th , 2021. Taunusanlage 5, 60329 Frankfurt am Main, Germany .

Ladies and Gentlemen, Welcome!

As Chancellor, it has fallen to me to thank our beloved Bundesbank, in its very offices, for having kept an even keel on our economy in these difficult times in cooperation with the European Central Bank. As you all know, I cannot stand to offer you a toast to your good health(laughter), but where the body fails the mind can try to overcome.

But I particularly want to thank our former ECB head, Axel Weber, for having laid the groundwork that allowed the European economy to react so well and so flexibly to the COVID epidemics. Only his pigheaded insistence in the face of huge political pressures on having a firm plan for coming OUT of an easy money policy similar to those adopted in the US and previously in Japan BEFORE even trying to enter that funnel avoided us the kind of money printing we are seeing in those other main areas right now. Enter that we did, but thanks to the strict time limit he insisted on putting into the relevant regulation, and the proviso that at least two years of stable ECB total Balance sheet with at least 2% positive official rate should elapse before any similar measures could be proposed, the political class had to reform or retire. Given the option, my predecessor decided to retire, as did many in the previous political class in EU countries.

I also have to praise his firm insistence on building a sound market framework for separating traditional banking activities from asset management, resolving at last the conflict of interest that plagued Central Banks since the explosion of managed money, namely between making sure that banks were privileged investors over the savers whose money they had in custody and a sound functioning of price formation. And above all I praise his two more brilliant strokes: passing the principle that any investment vehicle could not have any instrument that all potential holders could not buy directly in a size proportionate to the saver's investment ended the distortion where small savers had to pay a Danegeld to financial institutions to get exposure to instruments that nominally were limited to “institutional” investors, often through artificially high minimum denomination, but in reality whose risk fell entirely on final savers with an added management fee slapped to it. It further helped shepherd the most important consequence, the establishment of a single financial market for listed bonds and equities, accessible by law to all EU citizens at the stroke of a keyboard. In a way, Governments have reestablished a tradition of ancient times, where regulation insists on Markets, which are public venues.

Of course, his evangelization on the distortions of negative rates and his illuminating lectures on the thinking of Bagehot made us face a recession …. when we at least could afford it, and we should all praise him for having made sure that Europe was financially ready to face COVID in a much more orderly way than other blocs. And by “orderly”, I mean the natural function of markets of picking the best alternatives under a money constraint, not the false Gods of “Orderly” as in sweeping volatility under a rug of money using a broom made of regulation. The ability of companies to cheaply access savers thorough listing on the single market, with a single distributed supervision, has enabled Europe to lower the importance of banking as a single point of failure in financing new capital formation.

We also did our part, in enforcing a drastic simplification of rules and granting new powers and duties to antitrust authorities. Going from a “too big to fail” model, which meant putting society at the service of institutions, to a “not too big to be broken up” has been traumatic to most, but in this terrible circumstances it has proven its powers. Orderly dissolution of financial institutions can happen, if they are not systemic and the general public has trust that laws are fairly written and equally enforced, and that's what happened, without any international doubt on the solidity of the common currency. The enhanced access of firms to savers by simplified listing of instruments also improved banking through competition. Europe is alone in having more distinct companies listed than collective vehicles authorized to invest in them. Gentlemen, you should be proud.

Who would have thought that this TRUE single financial market would have sparked the kind of EU integration that Monet and Schuman dreamt of? Today, the number of companies spanning more than one country in the EU has become enormous. True, the English VP of the European Parliament usually chuckles at me for the adoption of English as the financial language of choice, but in that we only thought of our community best interest: doing that made sure that US investors feel quite at home putting their money over here, in increasing numbers. So, Ladies and Gentlemen, Three Cheers for the BuBa!