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Marsh on Monday
Dec. 6, 2010, 12:01 a.m. EST
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The mood turns ugly in Europe
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Stocks look at stimulus beyond jobs report
By David Marsh, MarketWatch
LONDON (MarketWatch) "” Not everything that central bankers say should be taken at face value. Anyone in charge of issuing paper currencies "” that most virtual and improbable of concepts, lusted after by all, manipulated by a few, understood by no one "” has to have more than a thimbleful of actor's blood coursing through his veins.
Take Mervyn King,for example, governor of the Bank of England. In February 2010 he tut-tutted to Louis Susman, the American ambassador in London, that the then-Conservative opposition leader and now prime minister, David Cameron, and his shadow chancellor of the exchequer, George Osborne, were a bit on the young side and "” as untried politicians "” might not have the experience and the aptitude to carry out urgent budget cuts should they come to power.
Nine months later, with Cameron and Osborne installed in office after the May parliamentary elections, King (and others) have not been too amused as revelations of his behind-closed-door conversation have spread around the world thanks to Wikileaks.
But it would be wrong to interpret his remarks as outright criticism of two men whom King well knew were likely to be future leaders. Far more likely that King "” a courteous, scholarly, rather shy man "” was using his interview with the ambassador to show that, as a master of money, he had a few other tricks up his sleeve and could make judgments on far more sweeping matters than the future growth rate of the monetary aggregates.
In short, as well as being a mere central banker, he wanted to show he was a versatile man of many talents, something of a star player.
Ireland's Parliament vote on the austerity budget, German economic data and the Bank of England's policy meeting will be in the spotlight next week. U.K. food retailer Tesco will release a third-quarter sales update, while European airlines will report November traffic statistics.
We see plenty of other cases where central bankers display instincts and leanings that they do not necessarily feel. In the vexed question of Economic and Monetary Union, many officials in Europe have been reluctant to say out loud what many were really thinking.
In the early years of the single currency, people such as Jean-Claude Trichet, president of the European Central Bank, already saw visible warning signs "” such as rising current account deficits and lowered competitiveness in the peripheral countries of Europe. But they certainly didn't speak much "” or at all "” about these signals in public.
The reason? Experienced monetary and financial policy makers such as Trichet knew from the start that that EMU was viewed with hostility by many in the Anglo-Saxon world. This was partly for mercantilist reasons "” the British and Americans saw EMU (more clearly than the Continentals) as a means of keeping down the value of the "euro-ized" D-Mark and therefore boosting German exports. And partly it was a question of rivalry with the dollar, which the U.S. establishment was on the whole not keen to promote.
Trichet was not enthusiastic at all about telling the rest of the world about the euro area's weak spots "” which is why, on ceremonial occasions such as euro anniversary speeches (of which there were far too many) or at other events, he tended to concentrate on positive views "” and downplayed the negative news or left this out of his speeches altogether.
As long ago as 1994, legendary speculator George Soros named this psychological displacement phenomenon "the emotional amplifier" "” noting that the then-governor of the Banque de France (a certain Jean-Claude Trichet) tended to apportion responsibility for a series of monetary mishaps to factors that were actually not to blame. "Who would have thought," Mr Soros asked rhetorically, "that respected officials like the newly appointed head of the Banque de France really believed in an Anglo-Saxon conspiracy to destroy the Franco-German alliance?"
Thanks to the word from Soros, we know that the derogatory statements of the British central bank governor on the young Conservative politicians had their roots not in monetary policy but in psychology. In some ways, though, the Wikileaks revelations may be useful for King. In recent weeks he had been criticized by some British observers "” including members of the Bank of England Monetary Policy Committee "” for allegedly being excessively close to Cameron on the latest budget cuts strategy.
Now you have the proof that the ultimate guardian of British monetary sanctity, far from exuding a pro-Cameron bias, really does maintain a critical distance to the new U.K. prime minister. A seasoned central bank governor will always need to look at everything from at least two sides.
Now, thanks to Wikileaks, we know that "” in Britain at least "” he does.
David Marsh is co-chairman of the Official Monetary and Financial Institutions Forum.
A disappointing jobs report fails to disappoint investors, who are still looking at central banks to continue playing Santa.
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