German Central Banker Soothes Markets Ahead of Jackson Hole Meeting

 | Aug 16, 2017 | 9:00 AM EDT
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A little more than a week before the central bankers' annual meeting in Jackson Hole, Wyoming, a survey of fund managers revealed that fear of a policy mistake by the Fed or the European Central Bank is investors' top concern. They should perhaps read a speech made on Tuesday, Aug. 15, by an important German central banker, to get some perspective.

The monthly survey of global fund managers from Bank of America Merrill Lynch found that the fear of a monetary policy mistake by these two major central banks was cited by 22% of investors as their top concern in August, ranking higher than the risk of a crash of the bond market (19%) and North Korea-related risks (19%).

This is particularly relevant since, as the Financial Times has calculated, major central banks now own about one fifth of their governments' debt. Any mistake in winding down these asset purchases could, therefore, lead to deep market turbulence.

Investors are waiting for Mario Draghi's speech at the Jackson Hole meeting with trepidation, because they are afraid it will hint at the central bank's plans to start winding down its bond purchases. There is some reason behind this concern.

Let's not forget that Germany, the eurozone's biggest member and perhaps its thriftiest, holds general elections on Sept. 24. So Draghi could try to address Germans' hate of money-printing in his speech. For investors, there might be clues in what German central bankers are already saying about how dovish or hawkish Draghi will feel he has to be .

Most recently, Dr. Andreas Dombret, member of the Executive Board of the Deutsche Bundesbank, held a speech on Tuesday in Pretoria, South Africa, presenting the challenges facing the eurozone -- but also the opportunities.

Among the challenges, the fact that economic cycles are not synchronized 18 years into the monetary union is perhaps the biggest one. Unemployment rates ranging between more than 22% in Greece and below 5% in the Netherlands are testament to the big discrepancies plaguing the European Monetary Union.

The second challenge is that the consequences of the imbalances between member states are being borne by the populations of these countries. The people know this, and confidence quickly wanes in a crisis.

"What the course of the crisis quickly revealed is that the euro area was unprotected against spillovers and contagion," Dombret said. "Because economic burdens could not be absorbed within their supposed boundaries, the euro area community was found to be ultimately accountable for the imbalances. The chief diagnosis therefore was, and still is, a mismatch between instruments and responsibilities."

Structural differences will remain a source for imbalances in the future, he warned, quoting the famous Murphy law that "anything that can go wrong, will go wrong." Besides, eurozone officials are still searching for the right answers on how to make the single currency area safer, despite good progress in recapitalizing banks and towards achieving banking union.

"We have to live with the fact that the fragilities that fed into the crisis partly continue to exist. Europe will have to continue walking a thin line, balancing short-term expediency and long-term efficiency of reforms," he said.

The over-arching issue, however, is the same one that led to the Brexit vote in the U.K.: compromise at a European level will affect sovereignty at a national level. This is hard to reconcile with the fact that there are differences between countries' philosophical approaches to their economies, too.

"So the challenge is not only about bridging differences in economics, but also about bridging gaps in ideas and political attitudes," the German central banker said.

And here is where the paradox of the EU becomes obvious: Despite these differences, there is very strong determination on the part of Europeans to make the union work. As Dombret pointed out, "in all parts of Europe, the union is not only seen as part of the problem, but usually also as part of the answer... I find it very comforting to see the determination and strong will of all the travelers on that journey."

His speech indicates a willingness by the German central bank to keep searching for the compromise between northern and southern eurozone economies that would allow the euro area to not just survive, but over the long term even thrive.

How do you say "whatever it takes" in German?

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