Draghi Was Speaking Without German Authorization

Last week, Mario Draghi said that the ECB would do “whatever it takes” to save the euro, which was widely interpreted to mean that the ECB would intervene in the bond market to bring down Spanish and Italian bond yields. Following his statement, the Dow rose by over 500 points, reflecting the market’s expectation that the ECB will rescue the eurozone.

Readers will recall that I said to ignore anything Draghi says unless it is followed up by support from the German finance ministry (Schauble) and central bank (Weidmann). Now the evidence is in: Draghi was speaking without German authorization (see below).

Draghi’s statement has no information value unless it is predictive of future ECB policy, and I don’t see that we know anything more about ECB policy than we did before he spoke.

There will be no deus ex machina from the ECB until he can persuade Weidmann, Schauble, Merkel and the Constitutional Court (i.e., Germany) that this is both legal and desirable. That may still occur, but it hasn’t happened yet. Once this fact sinks in, I expect that the stock market's balloon will start leaking air.