Tim Duy's Fed Watch

Running Silent

I will soon be boarding a flight on my way to a real vacation.  "Real" is defined as the absence of an internet connection, which will be the case for the first part of the trip.  Or so I am told by my wife who planned the trip, I suspect, by looking for locations without internet access.  More evidence that she is smarter than me. 

This week the Federal Reserve will likely be overshadowed by the European summit and the expected Supreme Court ruling on health care, both of which I will miss in real time.  Of course, if markets tank on European news and there is a sudden dollar shortage, we would expect the Fed to assist via expanded swap lines.  For their part, the Europeans are reaching a critical moment in history.  They still have time to walk back from the abyss, but they need to move quickly.  Paul Krugman outlines three sensible proposals that offer the most near term hope - shared backing of the banking system, enable the ECB to act as lender of last resort to governments, and a higher inflation target.  A real fiscal union is too much to hope for anytime soon. 

That said, while the Europeans have the capacity to move forward, the odds are all too high that they will choose to move backwards.  At this point, I can't see the latter two proposals seeing the light of day.  On the first point, today's comments by German Chancellor Angela Merkel seem pretty clear.  Via Bloomberg:

Merkel, speaking to a conference in Berlin today as Spain announced it would formally seek aid for its banks, dismissed “euro bonds, euro bills and European deposit insurance with joint liability and much more” as “economically wrong and counterproductive,” saying that they ran against the German constitution.

The ball is in Germany's court, and they are dropping in it. 

In other news, Greece is losing its finance minister:

Incoming Greek Finance Minister Vasilios Rapanos is going to resign after less than a week in office, according to the prime minister’s office.

The cause wasn’t immediately known, although Rapanos was rushed to the hospital on Friday after suffering from abdominal pain. At the time, the hospital released a statement saying he was admitted “because of intense abdominal pains, dizziness, nausea, sweating and weakness.”

Could be symptoms of extreme stress, which would hardly be surprising.  Note that Prime Minister Antonis Samaras will also be missing this week's summit for health reasons.  It is hard not to suspect that the new Greek government is trying to avoid their European counterparts after getting their hands on the books and realizing that they had no good news for the Troika. It is very possible that the Greek electoral drama over the past two months piled more almost-permanent damage on the Greek economy.  Very discouraging; I still have trouble seeing how Greece stays in the Euro, except that there is no mechanism for exit. 

Bottom Line:  I wish everyone the best managing in this difficult environment.  Posting will now be intermittent, depending on internet connection. 

A Long Wait to The Next FOMC Meeting

With the outcome of the June FOMC meeting settled, we can set our sights on the August meeting.  And at this point, the outcome of that meeting is just as hazy as the last.  There is once again a wide range of reasonable views, spanning from QE3 at the next meeting until early 2013, or not at all.  Calculated Risk reviews the various opinions here.  Interestingly, Goldman Sachs, who expected QE3 to be announced last week, has completely changed gears and is no longer expecting QE until next year.  This after offering up the possibility of open-ended QE on the eve of the last FOMC meeting!

Goldman's view is that the extension of Operation Twist was substantive enough to keep the FOMC on the sidelines.  CR takes the opposite bet, expecting QE at the August meeting, anticipating a low-bar for additional action.  Still, CR makes an important point:

Perhaps an argument against a QE3 announcement on August 1st is there will not be much data released between now and the next FOMC meeting. For employment, the only major report will be the June employment report to be released on July 6th. Also the advance estimate for Q2 GDP will be released on July 27th.

I have tended to argue that the calendar is very important, especially when policymakers are genuinely uncertain of the next most.  Absent major financial crisis, they need sufficient data to justify moving, and they just don't have it yet.  That story fits with last week's Jon Hilsenrath analysis of Federal Reserve Chairman Ben Bernanke:

When he has lacked conviction, though, his moves have tended to be very deliberate and have unfolded in step-by-step fashion over months, not days. One reason is that he has had to build consensus on a policy-making committee with sharply divergent views. Another is that he appears to be trying to gather information and calibrate his response.

Presumably one FOMC member Bernanke would like to turn is Richmond Federal Reserve President Jeffrey Lacker, who explained his dissent:

“I dissented on this decision because I do not believe that further monetary stimulus would make a substantial difference for economic growth and employment without increasing inflation by more than would be desirable. While the outlook for economic growth has clearly weakened in recent weeks, the impediments to stronger growth appear to be beyond the capacity of monetary policy to offset. Inflation is currently close to 2 percent, which the Committee has identified as its inflation goal. A significant increase in inflation could threaten the Fed’s credibility and make it more difficult to achieve the Committee’s longer-run goals, including maximum employment. Should a substantial and persistent fall in inflation emerge, monetary stimulus may be appropriate to ensure the return of inflation toward the Committee’s 2 percent goal

No surprises here.  In his view, monetary policy is out of bullets, leaving no benefits and only costs to additional action.  I don't think Bernanke is going to change Lacker's mind very easily.  Not that he has to - I still believe this "Bernake needs to build consensus" argument is fundamentally flawed.  At best there are three or four true hawks in the room.  Bernanke could achieve sufficient consensus if he really wanted it. 

Speaking of hawks, St. Louis Federal Reserve President James Bullard was back on the speaking circuit with a Bloomberg interview:

Federal Reserve Bank of St. Louis President James Bullard said today a possible third round of quantitative easing would face a “pretty high hurdle.”

“We can do that and I think it would be effective,” Bullard said in a television interview on Bloomberg Surveillance with Tom Keene. “But we’d be taking a lot more risk on our balance sheet. We’d be going further into uncharted territory.”

I find this to be disturbing, because here Bullard explains the Fed still has firepower, but instead has chosen the certainty of high unemployment to some uncertain risk.  I just don't understand how he sees this as an acceptable trade off.

Interestingly, Bullard starts to hit on a fundamental flaw with policy making with his remarks on the Operation Twist extension:

“It’s a continuation of the existing policy,” said Bullard, who doesn’t vote on the Fed’s monetary policy this year. “The committee felt that it was maybe a bit imprudent to end the twist program right at this particular juncture. The committee has kind of been haunted by having end dates on programs and it seems like the end dates never occur at the right moment.” Operation Twist was to have ended this month.

One would hope that Bullard follows this line of thought through to its logical conclusion:  The end dates are arbitrary, have no economic relevance, and only create unnecessary uncertainty in the policy making process.  Open-ended QE tied to macroeconomic objectives would eliminate this problem.

Bullard divulges that the FOMC still doesn't understand its job:

Bullard said that “Treasury yields have gone to extraordinarily low levels. That took some of the pressure off the FOMC since a lot of our policy actions would be trying to get exactly that result.”

The FOMC just cannot see that low interest rates are a sign of tight money, an expectation that the economy is facing headwinds and the Fed is not going to sufficiently offset the subsequent drag on growth.  They need policy such that interest rates start to rise on the back of economic gains.  That falling yields are a bad, not good sign, completely eludes them.

Bottom Line:  The fundamental problem is that the Fed has failed to communicate the trigger point for additional policy.  CR reads the tea leaves and concludes the bar is reasonably low; Bullard leaves the meeting thinking the bar is high.  The reality is likely somewhere in between.  I tend to think QE in August requires some pretty clear evidence that the labor market is moving in the wrong direction, and I am hesitant to think we will get enough such evident before then.  The next employment report and the weekly initial claims reports will be critical. 

 

What Fiscal Union Means

I was looking over FT Alphaville's recent summary of Nomura's Richard Koo's work on the root cause of imbalances in the Eurozone.  The main thrust of the thesis is that the ECB held interest rates low last decade to support Germany because Maastrict rules forbid a fiscal policy solution to Germany's woes.  But rates were excessively low for the periphery, triggering the emergence of bubbles and unsustainable imbalances. Basically, the root of the problem was a one-size-fits-all monetary policy worsened by an inflexible fiscal structure.  

So far so good.  What caught my eye was this quote from Koo:

Unfortunately there have been growing calls in the eurozone for fiscal union. But that would only make the problem worse by forcing the same fiscal policy on all countries, regardless of whether they were in a balance sheet recession.

This is true with regards to what is emerging as "fiscal union" in the Eurozone, largely a commitment to strict fiscal targets.  This, however, is not how I would define a fiscal union.  When I use the term fiscal union, I am thinking of a centralized budget authority capable of making automatic internal transfers.  

Paul Krugman has provided some very good examples of the importance of such internal transfers in the United States.  For example, see his discussion of Texas and the Savings and Loan crisis:

The cleanup from that crisis cost taxpayers about $125 billion (pdf), back when that was real money. As best I can tell, around 60 percent of the losses were in Texas (pdf). So that’s around $75 billion in aid — not loans, outright transfer.

Texas GDP was about $300 billion in 1987. So this was equivalent to giving — not lending, not even taking an equity stake — Spain 25 percent of its GDP to bail out its banks.

And in the US it wasn’t even treated as an interstate political issue.

Also, see his Florida example:

So as I read it, between falling tax payments without any corresponding fall in federal benefits, plus safety-net aid — not counting Medicaid, which would make the number even bigger — Florida received what amounted to an annual transfer from Washington of $31 billion plus, or more than 4 percent of state GDP. That’s a transfer, not a loan. And it’s very big.

These are examples of how assymetric shocks are cushioned within a fiscal union.  Transfers, not loans.  For the Eurozone to be successful, they need this kind of fiscal infrastructure.  Unfortunately, I think they are light-years away from such a union, and what they think is a fiscal union - strict deficit limits - is something very different, a union that as Koo says will make conditions worse, not better.  One of the many reasons I remain a Euroskeptic.

Where To Next?

This will be my final FOMC post-mortem.  At least I hope so.  I remain as frustrated at the outcome of this meeting as in the run-up to the meeting. Reviewing what I already wrote as well as comments across the web leaves me with this:

1. The general argument that supported expectations of QE3 was broadly correct.  The basis of this argument was a deterioration in the forecast matched with moderating inflation data and increasing downside risks.  A solid argument in light of speeches by Vice Chair Janet Yellen and San Francisco President John WIlliams.  And this line of thought was consistent with the Fed's actual projections.  The Fed, however, did not follow through on their own projections, which is frustrating.  It strikes me as a sloppy communications strategy.
2. The Fed wants to see more data before making another move.  This seemed to be evident in Bernanke's press conference. I suspected this might be the case, but am surprised that while they are sufficiently uncertain of the data to forestall QE, they were certain enough to mark down their forecasts.
3. The labor market remains a critical indicator.  It is clear from the final sentence that sustained progress in labor market conditions would prevent additional easing, and vice versa.  At least this seems clear - arguably, by this metric the Fed would already embraced QE3.  Again, they want more data.  The possibility that seasonal adjustment issues are at play in the data weighs heavily on their minds.
4. The Fed is very uncertain about the impacts of additional QE.  This uncertainty is probably the most significant impediment to additional easing.  It is really the only explanation for Bernanke's hesitation to do more now; clearly the forecast justifies additional action as it indicates the Fed does not expect to meet either its employment or inflation mandates.  
5. The form of additional easing remains uncertain.  Like other officials, Bernanke did not close the door on additional asset purchases.  I noted earlier, however, that the statement no longer singles out balance sheet operations as the next tool.  Arguably, this change was simply necessary to eliminate the "composition" of the balance sheet option, as the Fed's ability to change the composition via twisting will expire at the end of the year.  That said, they could still change the composition by shifting between Treasuries and mortgage assets, so the composition tools is not necessarily dead.  Or they could be signalling an intention to use communications tools as an alternative to QE; Yellen has suggested this possibility.   My baseline scenario is that if additional easing is deemed necessary, asset purchases will be the likely option.  Still, I think it is worth being on the look-out for other options.

Bottom Line:  It is as if at each meeting Federal Reserve Chairman Ben Bernanke moves half-way again to additional easing, but never seems to get there.  It is one of those philosophical problems.  Maybe next time he will make it.  If the employment data falters.  And he believes the data.  And he believe that QE will be effective.  And if a blessing of unicorns marches down Constitution Avenue.  

This Is Just Sad

The projections are up, and I think they are shocking:

In contract to the tone of the statement, this is a significant downward revision to the forecast for not just this year, but next year as well.  Moreover, they expect no meaningful progress on the unemployment rate and the PCE inflation forecast remains centered well below 2%.

So, the basic analysis done by those expecting QE3 was correct.  The forecast was revised significnatly downward, with no change in inflation, and downside risks have increased.  But the Fed did not follow through on the logical conclusion to pursue QE3.  

What exactly is the bar to additional QE if this is not it?

Twist It Is

The FOMC just released their statement, dashing hopes for QE3.  We are still waiting on the press conference, but some quick thoughts.  First, the Fed does not appear to be particularly worried by recent weak data:

Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

I suspect that the weak tone to recent data was countered by the relatively solid anecdotal tone of the Beige Book.  They do not appear to have marked down their forecasts as substantially as many believed.  Also, they may want additional data to confirm any recent weakness.

Second, they continue to state the case for more easing:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

Yet, despite making a clear case for aggressive policy, they still don't follow it to its logical conclusion.  This is indeed maddening and is the primary reason market participants expect sizable QE is coming.  The FOMC sets ups the justification for easing meeting after meeting, and then simply does not deliver.  

Third, consider the final line:

The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

Now compare it to April:

The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.

In April they specifically pointed to the balance sheet as the tool of choice.  Now they just promise further action.  Sounds like they intentionally want to take the focus off the balance sheet.  This could be a very important signal about the direction of future policy.  Do they view further QE as largely ineffective given low interest rates and constrained credit channels, and now reserve its use for only the most dire circumstances?  If not the balance sheet, then what?  Communication?  Perhaps I am reading too much into this line, but it seems to be a significant change.  I sure hope some reporter asks about this line at the press conference.  Hint, hint.

Finally, we still have a dissenter, Richmond Federal Reserve President Jeffrey Lacker.  The tone of the data was insufficient to change his mind that Operation Twist should end as scheduled.

Bottom Line:  Internally at the Fed, the risk/reward trade off still does not favor additional QE.

 

Two Days Until the Fog Lifts

Some additional stories to consider as await the outcome of this week's Fed meeting. First, tonight's Jon Hilsenrath WSJ article detailing the Fed's concern about the credit divide:

The housing bust left behind millions of people with credit records damaged by plunging home prices, lost jobs, past overspending or bad luck. Many are now walled off from the low interest rates engineered by the Federal Reserve to spur the economy and remedy the aftereffects of the borrowing boom...

...Shrunken access among credit have-nots is triggering more than personal plight. It has weakened the influence of the Fed—one of the best hopes for spurring stronger economic growth—and raised doubts within the central bank about whether it is doing much to reduce unemployment...

That underwriting conditions have tightened dramatically is not exactly a new story - as Hilsenrath writes, the Fed released a report urging Congress to take action to ease credit conditions in mortgage markets.  What is interesting is the timing, coming just two days ahead of what is likely to be a somewhat contentious FOMC meeting.  The underlying context of the story is that if credit market channels are clogged, additional action on the part of the Federal Reserve will have little impact.  Consider this in terms of the risk/reward trade off that Fed official like to cite when discussing options for additional easing.  They may be hesitant of taking the risk that all they get from additional easing is criticism from lawmakers - and no shortage of it during an election year - in return for very little benefit.

The article also highlights the Fed's fetish with low interest rates.  They should forget about trying to keep interest rates low, and instead enact policies that support enough growth such that interest rates begin to rise.  This is of course how policy is supposed to operate - long-term rates rise as market participants believe the Fed will need to raise short term rates in response to real inflationary pressures, not just the phantom ones in the minds of a subset of monetary policymakers.

With that in mind, Zero Hedge posts Goldman Sachs' FOMC preview Q&A.  Goldman is expecting a new round of QE, largely on the expectation that the Fed will significantly mark down its economic forecast as well as feel a need to respond to the European crisis (in effect, doing the job the ECB has abdicated).  This is a greater policy response than the more generally expected extension of Operation Twist, but also a completely reasonable expectation given the some of the Fedspeak we have heard.  Goldman, however, suggests the Fed might go one step further:

 If it is specified as a "stock" of purchases, we would expect a similar size as in past programs, i.e. $400bn-$600bn over 6-9 months. However, it is also possible that the program would be specified as a "flow" of purchases of perhaps $50bn-$75bn per month. 

I believe the emphasis was added by Zero Hedge.  Given that the Fed has repeatedly emphasized that it is the stock of holdings, not the flow, that is important, this would represent a major policy shift.  The Fed would be finally utilizing the expectations channel, effectively promising to hold policy steady rather than promising a discrete end date. 

While I would greatly welcome open-ended QE, it seems like a pretty big leap for a central bank that just a few weeks ago was expected to hold policy constant.  Moreover, I am hard-pressed to say that economic or financial conditions have deteriorated such that the Fed would shift gears so quickly.  This doesn't feel like 2008.  I am not even sure it feels like last fall when the Fed embarked on Operation Twist.  That said, the Fed might suspect, or know, that Europe is going down the tubes on the back of some let's just say some questionable economic policy making.  Better to get ahead of that curve.  Well ahead.

Bottom Line:  More grist to chew on as the Fed's two-day meeting begins, with one take away that the Fed might opt to do less than expected, and another much more.

 

The Monday After

Today is the first day after the "crucial" Greek vote.  Except that vote was probably not all that crucial. Nothing fundamental has changed in Europe over the weekend. At best, all that has been accomplished is pushing out the end-game once again.   

The Financial Times reports that Greece is on the verge of forming a government:

Antonis Samaras, leader of Greece’s New Democracy, began talks to form a coalition government on Monday following his party’s failure to secure an outright majority in the country’s election.

If Europe thought this would be the end of the story on the last bailout, think again:

Mr Samaras told reporters after his meeting with Mr Tsipras that he would invite all pro-European parties to join a coalition government.

He also restated his determination to seek “alterations” to the bailout by renegotiating the terms with Greece’s creditors.

Bloomberg reports that German Chancellor Angela Merkel just says "nein" to such bluster:

German Chancellor Angela Merkel said Greece shouldn’t be granted leeway on terms for its bailout, rejecting signals from her foreign minister that creditors may relent on austerity measures...

...“The important thing is that the new government sticks with the commitments that have been made,” Merkel told reporters at the G-20 meeting in the Mexican resort of Los Cabos. “There can be no loosening on the reform steps.”

Yes, another showdown is certain.  Merkel will give up only the slightest sliver of ground, almost ensuring the Greek economy remains locked in a never ending cycle of austerity.  And according to rumor this is exactly why Alexis Tsipras, the leader of Syriza, has no interest in joining with New Democracy in a coalition government, instead leaving the inevitable failure of this next bailout on the shoulders of his opponents.

And while the world learns about Greek politics, the real story is Spain.  Clearly, market participants saw nothing good in the Greek results for the trajectory of Spain's problems.  Yields on 10-year debt surged solidly above 7% today:

Of course, if European policymakers expected a pro-Euro Greek outcome to bring relief to Spain and Italy (now above 6%), they were sure to be disappointed.  Hopes for a firewall around Greece are so 2011.   The fire has already jumped that line, and it looks as if Europe has yet to send any firefighters to battle the blaze.  Meanwhile, the only institution that can move quickly remains committed to standing on the sidelines.  To be sure, ECB President Mario Draghi signalled that the ECB has room to move, but he did not signal the timing.  For the sake of the Spanish people, it really needs to be sooner than later.

Bottom Line:  This Monday feels like all the others.  The latest Greek vote is behind us, but the the dysfunctional political and economic system that is Europe remains. 

Communications Failure

Reading Cardiff Garcia's preview of next week's Fed meeting, I was struck by this chart from Nomura:

The extensive discussion of options with arguments for and against reminded me of the fog that hangs over this next meeting.  We really have no idea what the Fed is going to do or why they are going to do it.  Reasonable analysis ranges from nothing to massive quantitative easing. 

To be sure, I am certain of some things.  For example, that swap lines will be expanded in the event of a severe market disruption. I am stunned that this was actually considered new information yesterday - it seems that actions along these lines is a no-brainer.  But absent the all-bets-are-off-financial-collapse story, I am a bit shaken by the uncertainty going into this meeting.

This strikes me as a major communications failure on the part of the Federal Reserve.  The problem, I suspect, is that they don't know exactly what they would do if more easing is called for, which is why we  see talk of all possible options - doing nothing, extending Operation Twist, communication changes, and additional assets purchases.  They can't tell us what they don't know.

I worry that the Federal Reserve has spent much more intellectual effort on procedures to tighten policy, and not enough effort on additional easing policy.  Indeed, easing has really been on an ad-hoc basis.  Moreover, we don't really know the triggers for additional easing because officials repeatedly refer to the risk/reward trade off, suggesting that they think the rewards are relatively small at this point, which suggests that the bar must be very high.  But many policymakers seem to have a hair trigger for additional easing, so which is it?  It the bar high or low?  Judging by Federal Reserve Chairman Ben Bernanke's past behavior, I tend to think the bar is pretty high.  Perhaps this is just my pessimism talking.

It would be very helpful if at the next FOMC meeting policymakers could agree to a specific path for additional easing, if needed, and eliminate the ad-hoc approach.  In other words, put as much effort toward explaining how they would move forward as put toward how they would move back.

ECB Ready to Play?

Draghi blinks.  After dropping the ball and holding rates steady at the last meeting, ECB President Mario Draghi is signalling he is ready to get back into the game.  Via Reuters:

The euro zone economy faces serious risks and no inflation threat, European Central Bank President Mario Draghi said on Friday in comments that heightened expectations the ECB could cut interest rates or take other policy action soon.

Draghi also said the ECB stood ready to provide further liquidity to solvent banks, stressing that its provision of ultra-cheap 3-year funds, or LTROs, late in 2011 and early this year had averted a major credit crunch...

...There are serious downside risks here," Draghi told the annual ECB Watchers conference in Frankfurt. "This risk has to do mostly with the heightened uncertainty."

I am not so sure about this "heightened uncertainty" line.  It seems pretty certain that Spain is in trouble if rates hold at these levels or head higher, and this is the immediate problem.  Draghi might have in mind bringing down rates with another stab at the temporary solution the LTROs provided last year.  Helpful, but still only temporary.  It would be more helpful if he switched gears to outright quantitative easing via government bond purchases (oddly, though, the expectation is that the Federal Reserve will do more than Europe in response to a European problem).

What would be most helpful is a clear signal that the ECB will not let the Eurozone collapse because default fears are driving unpleasant dynamics.  Consider this helpful chart from Frances Woolley:

Woolley comments:

The convergence of bond yields after the Euro was introduced reveals that the pre-Euro yield differences were almost entirely based on inflation and exchange rate risk. No one ever seriously considered the possibility that an EU country might not be able to repay its debt. That's what they were thinking...

Prior to the introduction of the Euro, the presence of independent central banks prepared to serve as a lender of last resort for the fiscal authorities meant that there was no serious default risk.  There would, of course, be inflation (soft-default) and exchange rate risk, but no hard-default risk.  You can't really default when you can print the currency in which your debt is denominated.  After Lehman, though, the possibility of default appears, and the ECB does nothing to dispel such fears.  Moreover, the Greek debt restructurings dispelled any remaining doubts about European sovereign debt - the lack of a central bank backstops means serious default risk.

So now we can't rule out a possibility of Spanish default, which drives interest rates higher, which in turn increases the probability of default.  This of course then feeds into the dynamics for Italy, and then maybe France.  The only entity that can break the cycle is the ECB, but they have been so far unwilling to do so, putting the pressure on fiscal authorities to break the cycle.  Unfortunately, the job is simply too big and complicated for the fiscal authorities to complete in a timely fashion, especially when running Merkel's race against the markets.

What we really need is a European Central Bank that can manage exchange rate and inflation risk while also addressing default risk.  Without such a fully functional central bank, Europe will at best limp along under constant economic distress.  Ultimately, Draghi will need to create such a central bank before the fiscal plumbing is in place if he wants to hold the Eurozone together. Which is why he will always blink first.  

Or at least I hope he will.