Here Bee Draghi

Given the tsunami of reporting about Mario Draghi’s remarks last week, not to mention the huge market reaction, it’s kind of strange how few links I’ve seen to what he actually said, which is considerably stranger than you’d gather from the coverage — and has a definite plaintive note, too.

Here’s the passage that caught my eye:

The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now – and I think people ask “how come?” – probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis. The bumblebee would have to graduate to a real bee. And that’s what it’s doing.

Only considerably later did he make the declaration that the ECB would do “whatever it takes” — a declaration everyone seized on, but which may mean little.

The thing is, we know pretty well why the bumblebee was able to fly: massive capital flows from the core to the periphery, which led to an inflationary boom in said periphery, and which therefore also allowed the German economy — which was in the doldrums in the late 1990s — to experience a big gain in competitiveness and hence a surge in its trade surplus without needing to go through painful deflation. This meant, in turn, modest inflation in the eurozone as a whole — slightly above 2 percent over 1999-2007.

To keep the thing flying, you’d need something like a reverse play along the same lines: an inflationary boom in Germany, so that the periphery can regain competitiveness without devastating deflation. And it would actually have to involve a higher rate of inflation, both because the required adjustment is bigger and because the periphery is a smaller share of euro area GDP, which by the math means that overall inflation needs to be higher to accommodate a given amount of relative adjustment.

Nothing like that is happening. Germany is arguably close to full employment, but not in an inflationary boom; expected euro area inflation appears to be less than one percent.

And as for graduating to a real bee — that will take time that Europe doesn’t have.