Mario Draghi, new head of the European Central Bank (ECB), is extremely good at doing deals. He learnt his trade at Goldman Sachs, and then polished his skills whilst running the Bank of Italy. But unfortunately, deal-making skills are not enough to rescue the European economy.
Earlier this month Draghi persuaded the ECB Board to begin Outright Monetary Purchases (OMT) of bonds from the weaker economies, such as the PIIGS (Portugal, Italy, Ireland, Greece, Spain). The news, of course, delighted financial markets. But Draghi’s deal-making magic cannot create the economic and fiscal union required to support monetary union.
Thus the real economy continues to stumble along. The auto market is the largest single market for chemicals, and data released Tuesday continued 2012’s depressing performance:
• July sales (red square) were down 8% versus 2011(green line)
• Germany was down 5%, as its export-orientated economy slowed
• August sales were down 9%, with Germany down 5% again
• Overall, sales so far in 2012 were down 7%
The key issue is that Europe’s consumers have begun to distinguish between ‘needs’ and ‘wants’. And Europe’s ageing population simply does not need to buy so many cars as in the past. So growth will be slower, just as it has been in Japan over the past 2 decades.
This reality will dawn on policymakers one day. But until then, well-meaning central bankers such as Draghi and Bernanke will continue to try and pull rabbits out of hats.