Sir Mervyn King's message
Sir Mervyn King had two big messages in his latest press conference today, one for people here in the UK and one for the eurozone.
The message for the UK audience was "be patient": the outlook seems bleak, but rest assured, the government and the Bank have done more or less everything they can do to get the country back on track. It's just going to take longer than we thought - maybe a lot longer, depending on what happens across the Channel.
His message for the eurozone was "shape up": you should stop fooling yourselves that this is a simple cashflow problem, and France and others should stop thinking the European Central Bank (ECB) can get them off the hook.
I'm not sure which will be less popular.
Certainly, the new UK growth forecasts look as grim as expected. Only three months ago, the Bank's central forecast was that UK output would expand by more than 2% between the middle of 2011 and the middle of 2012. That has now been roughly halved, to about 1%.
The governor did not re-enter the argument about the reasons for Britain's slow growth in the first half of the year. But Sir Mervyn was in no doubt that the recent gloom, since the summer, is down to the eurozone. Whatever happens in the next few months in Brussels or Frankfurt (or Rome), the eurozone will face slower growth as a consequence of the crisis, and so will the UK.
Sir Mervyn's views on the eurozone - and the ECB - will not come as a surprise to those who have heard him speak privately and publicly on these issues over the past year. As I noted in the summer, he has never thought that central bank liquidity was a solution to the crisis - only a way to buy time. And he has never thought the ECB should or could be the saviour of the euro, by buying vast quantities of Italian - or Spanish - government debt.
Why? Because, as I have explained on too many occasions, to ask the ECB to step in, in these circumstances, is basically to ask it to take risks onto its balance sheet, on behalf of a fiscal union that does not yet exist.
Suitably designed, the ECB's balance sheet could perhaps be a temporary bridge to a full-blown fiscal union. But it's quite something to ask it to play this role in a vacuum, however convenient that might be for governments like the French. Apart from anything else, it's deeply undemocratic. No-one ever elected the ECB. It was expressly designed to be beholden to no-one in the pursuit of its mandate.
The governor has said all this before, but he has perhaps tried a little harder, in the past, to hide his frustration. Today he said, testily, that most of the people who thought the ECB should be a "lender of last resort" for the euro seemed not to understand what a lender of last resort actually was.
In a sense, he's right. The Bagehot definition of "lender of last resort" applies to financial institutions, and involves lending to solvent concerns, at good collateral, for a "penalty rate". That is what the ECB believes it has been doing, in the past few years, with its emergency lending to Greek and other eurozone financial institutions. It is not what it thinks it is doing when it buys Italian or Spanish sovereign debt, which it has always defended, very separately, as an element of monetary policy. The claim is that the ECB's low interest rate policy is not getting through to these countries because of what is happening to their sovereign debt. Though, of course, German and other critics see that as a smokescreen for deeper, political motives.
But you can see, even from this brief description, that the dividing lines are not nearly as sharp as Sir Mervyn implies, or the ECB would like to claim.
The governor said buying a lot of periphery debt would be tantamount to financing those countries' current account deficits: in effect, a transfer from surplus countries to creditor countries, which should more properly be the job of governments. You can see his point. But in many ways, all that emergency ECB lending to periphery banks has achieved exactly the same thing.
Greek banks can't borrow directly from German and other surplus country financial institutions any more. But the lending - that transfer from surplus country to debtor - has not stopped. It has simply been replaced by the ECB. The Greek banking system now has a massive negative balance with the ECB. The German banking system has a massive positive one.
For the ECB, there is an important technical difference between the emergency liquidity programmes for banks and any sovereign bond purchases: in the lending to banks, the ECB gets collateral. In the second case, the sovereign risk is simply taken directly onto the ECB's balance sheet.
But in both cases, the ECB is helping to finance current account deficits which the private sector is unwilling to finance at a reasonable rate. And in both cases, it is taking risk onto its balance sheet which will ultimately be borne by eurozone taxpayers, particularly, one has to assume, taxpayers in surplus countries like Germany.
The governor may be right to have doubts about the ECB taking on a role that should more properly be played by governments - or institutions such as the IMF. He may also be right that, if the ECB is to have a big role now in "rescuing" the likes of Italy, this needs to be explicitly designed and underwritten by eurozone governments. It can't be simply down to the ECB governing council, or Mario Draghi.
But one of the things that makes the crisis in the eurozone so fiendishly difficult is that you can't draw an easy dividing line between "ordinary monetary policy operations" and "extraordinary current account financing" in a single currency area with one central bank and 17 sovereign governments. Or if you can, the ECB crossed it a long time ago.