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Pinchas-Landau“Curiouser and curiouser” is the phrase in Alice in Wonderland that expresses the poor girl’s increasing confusion at the weird things happening to her. Language purists would doubtless prefer “more and more curious”, but that is part of Lewis Carroll’s clever charm. Yet Alice never went the extra step and declared something “curiousest”, which does indeed sound wrong, but is no worse, linguistically, than “curiouser”.

It has long been apparent that “Alice’s Adventures in Wonderland/ Through the Looking Glass” are indeed child’s play, when set against the reality of the economic and financial reality of our own times. The jump from comparative expressions of wonder and amazement — “curiouser” for her, “amazinger” or “extraordinarier” for us — to superlatives is therefore justified. We live in the amazingest circumstances and are privileged to be witness to the extraordinariest things.

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Furthermore, last week’s superlatives are sure to be outdone by this week’s, so that what really was the extraordinariest thing you ever saw — in the literal sense, that it was the most out-of-the-ordinary thing on record — ceases to have claim on that title, because something far more extraordinary comes along and shunts it aside.

Thus there can be no doubt that the events in Europe that occured yesterday, Thursday, June 5, are the extraordinariest ever in the field of economic policy-making and the response thereto. It would be nice to think that they will remain so for a long time, ideally for ever. Unfortunately, it is more likely that their extraordinary extraordinariness will be eclipsed before long — and that is certainly not something to look forward to.

What was so (please insert your favorite term for unusual occurrences)? The very short version is as follows: the European economy is still very sluggish. Worse, inflation is fading and moving steadily closer to deflation, a state much dreaded in financial circles and especially by central banks. The pressure on the European Central Bank to take action against these highly undesirable trends in both the real and financial economies led its president, Mario Draghi, to commit last month to announcing “measures” this month, if matters did not improve. In the interim, new data showed that matters, so far from improving, were continuing to deteriorate.

There was thus no doubt that “Super Mario”, the man who single-handedly stopped the euro crisis in its tracks in the summer of 2012, would announce decisions of a decisive nature, following the bi-weekly meeting of the ECB on monetary policy. The debate among analysts was over how decisive and far-reaching the measures would be.
Given that the ECB had already cut its deposit rate — the rate of interest it pays to banks which deposit money with it — to zero, and that a further cut in this rate was essential, it was a given that the ECB would move to negative interest rates. That means that the depositor pays the bank for holding his money. There are precedents for this unusual/ amazing/ extraordinary state of affairs, but not at the level and scale of the ECB vis-à-vis the European banking system. In other words, extraordinariest was already in the bag, the question was the degree thereof.

In the event, Draghi cut the deposit rate by only ten basis points (0.1%) and the ECB’s main lending rate by 35 basis points, from 0.75% to 0.4%. He also announced many other measures, including providing ‘targeted’ money to banks for four years, on condition they use it to lend to borrowers — not the public sector. He said the ECB was preparing to buy asset-backed securities in the markets. In short he did a lot and promised more, but he stopped well short of what the financial markets really wanted, which was a program of large-scale purchases of government bonds, of the sort that the US Federal Reserve and the Bank of Japan have been engaged in for years.

The market reaction to these announcements, dribbled out gradually along with new forecasts of growth and inflation in the EU (both down for this year and next), was — well, extraordinary. Since there was no element of surprise, the name of the game was how much was Draghi going to do and, Draghi being Draghi and the ECB being the ECB, the answer proved to be on the low side of expectations.

One of the unspoken, but clearly understood, goals of the whole exercise was to weaken the euro, which had reached as high as 1.40 dollars last month. The more aggressive Draghi was the more the euro stood to go down — and European stocks and bonds to go up.

In the event, markets were all over the place. The euro rose, then fell sharply, to 1.35, then jumped back up to and through its starting-point at 1.36 — although it fell against many emerging-market currencies. The main stock markets, especially in Germany, were similarly volatile and confused, although the peripheral ones — Italy, Spain and, of course, Greece — reacted much more strongly and in a positive direction.

All this took place in the course of the European afternoon. A revolution, a genuinely unprecedented development in monetary policy had taken place, and even after the event no-one quite knew what to make of it. Was it enough? Too little — or perhaps too much? Maybe, as some fringe analysts claimed, it really didn’t make any difference, because the banks wouldn’t lend, because there was no demand to borrow — at least for real investments, as opposed to financial speculation.

Historic decisions were made of the most extraordinary sort. But that was yesterday, which will soon be last week. We need — and will surely get — something considerably more extraordinary than that effort.




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