A Hint From Draghi on the Euro?

Bruce Krasting's picture

So Mr. D spoke and said nothing at all. Those that expected a "big stick" from the boss at the ECB are very disappointed. The initial market reaction to this dud is a down move in equities and the Euro while Italian and Spanish yields soar. Given the high expectations Draghi set the market up for, I can’t imagine a worse outcome.


I read through the (very carefully worded) press release looking for something. There are few sentences that have me wondering. The first comes from the summary section where Draghi says:


decisive and urgent steps need to be taken to improve competitiveness


Okay, that sounds nice. But what does Draghi mean when he says “competitiveness”? Does he mean between Spain and Germany? Maybe.


One way to achieve the competitiveness that Draghi seeks, is to further punish the Spanish economy, and push unemployment higher (it’s now 24%) in a desperate attempt to push unit labor costs down. That would be an insane approach. Spain is already on its knees. Pushing the economy further into depression is not going to help at all. Also, a process like this would take years before the pain is converted into some gain.


Draghi used the word “decisive”. To me, this word implies something that might be considered a “game changer”. A multi year depression is not decisive, It is slow death. It is also politically unacceptable. Spain (and Italy) are not going to accept that they must have a depression to save France and the rest of northern Europe.


A step that would be “decisive” would have to be on the currency front. This gets us back to the talk of bringing back the Peseta (and the Lire), or some form of two tiered Euro. But I don’t think Draghi was suggesting that there would be a Euro breakup at this time in history. He was very clear on this when he said:


The euro is irreversible.


He also confirmed (to me) that there ways no "Euro breakup" in his mind when he made clear that the ECB/SMP would be buying more Spanish bonds at some point in the future. If there were a two-tiered Euro, the portfolio losses at the ECB/SMP would be enormous. The losses would be larger still if more purchases are made.


I conclude from all this that the probability of some kind of currency reshuffle within the Euro Zone is not in the cards at this time. But I’m still confused how Draghi thinks he can achieve the “urgent” improvement in competitiveness. There might be a clue from Draghi in the press release. I thought these words were odd:


Downside risks (to the economy) also relate to possible renewed increases in energy prices


Huh? What’s this about? Does Draghi know something about energy prices that I don’t?


In the statement, Draghi makes it clear that the Euro area is slowing. He also is no dope, he knows full well that the USA, S. America, India and most of Asia are also slowing down. There is nothing in the global economic mix today that would suggest that energy prices are going to rise anytime soon. So why would he make a point about it? Even more curious is why he would repeat his warning in the next paragraph when he speaks about the risk of rising inflation:


Upside risks pertain to further increases in indirect taxes, owing to the need for fiscal consolidation, and higher than expected energy prices over the medium term.


What is the one thing that Draghi could do that would cause energy prices within the Euro Zone to rise? The answer is he could cheapen the Euro versus the dollar. Absent a global increase in the price of crude, the only thing that would cause energy prices to rise in the EU would be a significant depreciation of Euro versus the dollar (and the Yen).


If Draghi was really serious about the “competitiveness” issue, then he would certainly be looking for a cheaper Euro that would “decisively” and “urgently” address a fundamental flaw of the Euro. It is dramatically overvalued.


We know that the Germans hate all the monetary options that Draghi would like to use in his war with the bond markets. Things like more bond buying, LSAPs and QE are not going to happen because of German opposition. However, the titans of German industry would jump for joy at the prospect of a 20% devaluation of the Euro. Merkel is up for reelection and she desperately needs those titans on her side. She also needs to have some improvement in the domestic economy. More workers making BMWs and VWs are just the ticket for Angela.


There is one other piece in this puzzle. What would the USA have to say about a plan that would cheapen the Euro versus the buck? On that score, I do wonder about the meeting last week that Timmy Geithner had on an island in the middle of the North Sea with those EU "deciders."


If the Euro were to weaken it would be a body blow to the US economy. It would be exactly the type of situation where the US Fed would act. A “decisive” effort to depreciate the Euro would give Bernanke the excuse he needs to put a big QE package on the table.


I was very surprised that Ben chose to “do nothing” yesterday. I wonder if this is not all being orchestrated behind closed doors. Ben needs the ECB to act first, and then he will quickly follow suit with an action plan of his own. This could happen between the scheduled meetings.


Is this far-fetched? I admit it is, but I don’t see any other options on the table. A significant change in the EURUSD rate is not out of the question.


I would not be long the Euro for a bit, just in case. And yes, I’m talking my book. From a week ago (Link):

I bet all of my recent FX gains on a short EURUSD option strategy. I missed a big blip that got the Euro above 1.2400, and ended up with a fill a bit over 1.2300.



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centre.europe's picture


in olden days you listened to Radio Free Europe to get the news - now you tune into rt.com - what an irony

ECB's Draghi dragged before EU ombudsman

Eurozone central banker Mario Draghi has been asked to justify his membership of an elite international financial forum by the EU after transparency campaigners claimed a conflict of interest, the bloc's watchdog said Tuesday.The complaint argues that the ECB chief's place in the "Group of 30", which describes itself on its website as a "nonprofit, international body" gathering figures from private and public sectors and academia, "is incompatible with the independence, reputation and integrity of the ECB".



centre.europe's picture

Draghi is fkng Reptillian - look the way it smiles

Coldfire's picture

This is great food for thought, Bruce.

Peter Pan's picture

All we see these bankers, politicians and economists doing is giving us little bits of some vague plan to restore balance in a world overladen with debt, unemployment, excess capacity and demographic problems.

Anyone who believes that they have some coherent plan to restore economic sanity is as stupid as they are. No offence but that is the truth as I see it.

As someone once said: "Do you know why the air hostess tells you to put your head between your legs in the event of a crash landing?"

Answer: "So you can kiss your arse goodbye."

Brace yourselves.


roadlust's picture

Could simply be waiting for the bombs to drop on Iran, and the collapse and spread of sectarian war across the middle east.  That would be good for at least a 30 percent jump in oil.

thegr8whorebabylon's picture

War on European soil by fall.  See the Balkins heating up.

darkpool2's picture

Aside from " trading" with the paper currencies, i just dont see any other viable option than to store current wealth in a " hard" form. I have dwelled on this long and hard, and nothing else realistically presents itself. Too much Real Estate leave you vulnerable to immobility, vandalism and taxing powers. The 3 H's seem to capture it all....health, home ( as in family) and hard assets.

chump666's picture

The short of the century will be the AUD and CAD once China explodes and the shock-wave takes out Australian and Canadian housing markets...it will be brutal. 

Cult_of_Reason's picture

You are funny Bruce.

You will never hear or get any hints from them about a euro break-up or re-introduction of ITL (Italian Lira) or ESP (Spanish Peseta) or DEM (Deutsche Mark) until the last millisecond before the actual official announcement over the weekend.

Euro will be irreversible until they suddenly announce it is reversible.

One Saturday or Sunday you will wake up and be given official EUR/ITL or EUR/ESP or EUR/DEM conversion rates.

BTW, Have you seen Irréversible? (2002 French drama)


Bananamerican's picture

"Huh? What’s this about? Does Draghi know something about energy prices that I don’t?"

My first thought was of the on again, off again, "Iran situation"....

Big Ben's picture

I don't agree that the euro is "dramatically overvalued". For example, the Economist's "Big Mac Index" indicates that the euro/dollar exchange rate is just about right on a PPP basis.

I am not sure how you can cheapen the euro without using euros to buy dollars or dollar assets. And where do you get the euros for these purchases? Of course, you can cheapen the euro by scaring people who hold euros or euro assets into selling them and converting to dollars. (They already seem to be doing fairly well at this.) But if people sell their euro assets, wouldn't that put pressure on the shakier euro assets, like PIIGS bonds?

And finally, even if the euro collapsed tomorrow, exports would probably not pick up immediately. That might take six months to several years.I wonder whether they have this much time.

Buck Johnson's picture

Your exactly right.  Also how will the EU people and businesses like the idea that stuff from overseas has gotten expensive.  And then add on top of that food inflation and such.  This is a hailmary pass to see if this will rekindle the game, all  or nothing.

TBT or not TBT's picture

Another way to get to the hinted higher energy prices would be an Obama admin orchestrated national security crisis right before the election....involving fireworks in the straits of Hormuz, and the traditional rallying around the president getting The Won over the top once more.

That would raise Europe's energy prices seriously.

In any case I do expect the Obama admin and transnational progressivists everywhere to stop at nothing to get their second term:

A) The statists must lock in their nationalization of the USA health sector, to get final full control over us cradle to grave, and

B) They feel viscerally they must use this historical chance, with so many Supreme Court nominations coming up in the next four years, to finish destroying the meaning of what Obama refers to as a "list of negative rights" a.k.a. our Constitution.

RIP the experiment in liberty that was the USA if Obama stays in office and keeps the Senate majority D's.

Item B is the real prize, because the Constitution is the heart of Rule of Law, and after it becomes corrupted and bastardized to the statists' purposes (to be decided in November) can only end in comprehensive, unending and terminally orwellian tyranny.

A Romney win with a Senate win can be clenched merely by the very natural double dip we see shaping up here occuring as it will, sans shenanigans by the statist left and their many bought up allies and shills.    That Romney win could mean an originalist majority Supreme Court for a few decades and a demise of statists plan for a good thirty more years(time between Carter/Obama-like leftist zero presidents).   Ergo there will be shenanigans, particulary with an amoral, anti-american president up there willing to go all in.

Arkadaba's picture

And Kofi Annan just today resigned the role of referee regarding ongoing events in Syria (which I found surprising and suggests events in the ME are closer to escalation than I thought). His reasons:


"The bloodshed continues, most of all because of the Syrian government's intransigence, and continuing refusal to implement the six-point plan, and also because of the escalating military campaign of the opposition — all of which is compounded by the disunity of the international community"

He is still toeing the (western) party line but he knows what comes next.

Edit: I was replying to point regarding energy prices. As to who wins the election - no difference - they are all playing by the same playbook.


q99x2's picture

One things for sure. Bankers are going to screw things up.

Mr.Kowalski's picture

The more I think about it, the more I believe Draghi comment on crude is related to the Middle East. If Assad cannot regain hold of Aleppo, it's over in Syria. This battle could very well be Assad's swan song. 

Mr.Kowalski's picture

Le Grande Plaza Accord ? Everyone devalues by 25%-- everyone is liquid, the speculators get their peepee's whacked-- whats not to like ??

But what will a sudden jolt like this do to interest rates ? What will it do to Forex CDS's ? Here's a link to what awaits such a move: 



SwingForce's picture

Draghi's son trades interest rate futures for Morgan Stanley in London. What was your question again?

ElvisDog's picture

Hold on, Bruce, what you wrote does not comptue. Draghi explicitly states that one risk to Euroland is increasing energy prices and then you speculate he wants to weaken the Euro. Doing that would cause energy prices to rise, exactly what Draghi says he doesn't want. But then Draghi comes out and contradicts himself? Hard to even speculate intelligently with a professional liar like Draghi.

steve from virginia's picture


A cheap euro with China buckling at the knees? Not gonna happen. China isn't going to cut the euro peg while leaving the dollar peg intact.

A cheap euro w petroleum @ $100 per barrel? Not gonna happen. The entire reason for the euro in the first place was as an energy hedge, not an energy sledge (hammer).

Nuttin' Draggy can do, he's a central banker ...




AGuy's picture

The Euro is going Lower one way or another. There are simply too many insolvent members for the Euro not to be devalued. Its very likely that at some point one of the northern members will leave the Euro and the currency will collapse.

Since the world economy is slowing falling back into recession, the price of Oil will fall even has major currencies devalue. With less demand for Oil because of the poor economy, the price will fall. At least for a period, but because production from cheap on-shore/conventional oil is being rapidity depleted the price of oill will stabilize and rise no matter how bad the economy gets. Proping up currencies would not prevent prices from rising either becuase of rising oil production costs.

Dragi's talk is nothing but kicking the can a bit to delay the Euro's judgement day. the ECB is effectively powerless since its the Bundebank that pulls all the strings.

Haager's picture

I read "don't short the euro", but I think that he meant that noone should coun't the euro out,  so there was absolutely no intention to say anything about short/long EUR/USD.

Roger Knights's picture

Perhaps Draghi's fretting about high energy prices is a signal that the EU should defer-until-conditions-improve the deadlines on its mandates to move to (more expensive) "renewable energy." Yep,  think that's it.

moneymutt's picture

Just wondering, what's worse for US economy in general, lower Euro, or lower commodities. It seems to me price of commodities are bigger issue as we are a big importer of oil, metals etc...meanwhile our exports to Europe are what, 2 percent of GDP?

So is Draghi with Bernanke or against him. Maybe there are fights between the power elites, but typically they are just trying to help elites and screw everyone else, not help one country over another.

Fecklesslackey's picture

Bruce ... How would the Swiss take this ... peg leg and all?

Bruce Krasting's picture

The weaker the Euro, the bigger the Swiss headache. They have hitched a ride to a potentially very weak currency. But fundamentally, the CHF should be strong. The peg is holding things together. But it can't be sustained in my opinion. The reserves would explode in this scenario. I have said that the Swiss will not go down easily on this issue. For that reason I am not betting on the USDCHF either way. I'm also not playing the short EURCHF.

When the peg blows there will be a hell of an explosion. I hope I have the "eyes" to see it coming about a month before the final break. I doubt I will get it right however.

Arkadaba's picture

I'm wondering what you think about Rosenberg's piece a few days ago? If he is right (and he made some good arguments) at least for the mid-term, US dollar is bullish because of Euro weakness and slowing growth in China (which will hurt Australian and Canadian exports and hence our dollars). I don't have a book but if I had one - next month or so USD will hold or advance a little...regardless of what happens world-wide.

Fecklesslackey's picture

Thank you for your response ... I'm rooting from your 'eyes', since my eyes are going to be on you

max2205's picture

I wouldn't over think this one BK

disabledvet's picture

Why don't you tell all the peons here BK how it feels to have all your LEVARAGE...."disappeared."

THE DORK OF CORK's picture

It always strikes me how more political the Euro boys have become over the years and thus the nature of the questions put to them by so called journalists.

The Euro is a currency union ,the last time I checked.

How can he make such a statement (although I guess he must) that he is certain the euro will not break up - if Central bankers confronted Politicos with the will and backing to print they would not be so sure of themselves........


Anyway the whole point (we were told ?) of the Euro was to burn oil like the Yanks could...........whats the point of it if we can't now ?

The Termites of Europe will find themselves in a much worse position then in the past..............expensive  oil and no control over their own affairs ...........a Euro nightmare ..........a gigantic setup by the international central bankers.


Spain and Italy don't so much need more tourists and stuff - they need a domestic medium of exchange that works for domestic commerce i.e .there is enough of the stuff around to pay wages rather then engage in the destructive wage arbitrage.......otherwise they will be another victim of international capital flows that will build unsuitable follies and then leave the building with no tokens to play with.

(PS In my town there is now multiple rubbish collecting companies who do the same job of the council in the past , they now need multiple friggen trucks when one did the job in the past...... - they can do this now because they pay less wages.....but they burn more imports (oil) to  acheive this false economy......thus we export more $$$ to be the best Euro bitch in the class.)

Mario two words for You.


Marge N Call's picture


Regardless of the pretense, the real reason for the Euro "currency union" was to avoid yet another terrible, unavoidable war among EU nation-states.

All it takes is one look at the Germany vs PIIGS/Draghi "debate" to see it will never work. You can almost feel the war coming, whether it be economic or military. Anyone who doesn't see this is not paying attention.


sodbuster's picture

There's always the simplest explanation as a possibility- None of them have a f**king clue.

John_Coltrane's picture

Or, as I like to say, "never invoke conspiracy when incompetence will suffice"

Nobody For President's picture

Upon reflection, I must admit, sodbuster, it passes Occam's Razor.

hungrydweller's picture

It's all a coordinated effort to manage the rate of decline of all fiat.  As someone once stated, currency prices don't float, they all just sink at different rates.  The game theory approach is how to manage that the best possible way to protect the banks, keep the populace under control, and keep Europe in a state of managed chaos.  Good luck with all that.

sangell's picture

I thought Draghi's endorsement and stressing of the 'conditionality' part of EFSF and ECB bond purchasing was significant. Yes the Euro maybe permanent but not who is using it. The 'conditionality' imposed on Greece seems to be working to expel that nation from EMU. Can't take the heat, get out of our kitchen. Think any Spanish government could impose such 'conditionality' on Spain or will Spain just have to get out too?

Nobody For President's picture

Bruce, these are the words from the statement I picked up on:



"The Governing Council extensively discussed the policy options to address the severe malfunctioning in the price formation process in the bond markets of euro area countries." 

I'm gonna shout:



There are many good reasons Spanish bonds are going through the roof - the market is working just fine, thanks. You don't like it Draghi, tough shit. Spain is literally paying the price for an orgy of housing boom/bad lending etc and government spending way, way beyond receipts. It is called excessive debt, and the bill is due.

But there is NO malfunctioning of price formation - the bond markets are working just like they are more or less supposed to - more risk of non-payment = higher 'premia'. Duh.



John_Coltrane's picture

Right On!  The markets need to set risk premia not central bank beaurocrats.  Don't like the rates?  Don't borrow so much and don't try to roll your loans.  Operate on cash flow.  That's how it works for individuals, companies etc.

Everyone knows Greece, Portugal etc. can't pay back anything they borrow-they are unproductive and uncompetitive.  You don't loan money to a deadbeat.  They need their own currency and wages like they had in the 1970s and 1980s.  These have always been the poorest countries in Europe.  

Oh, and when Greece doesn't get its bailout payment in Sept, they can start the ball rolling by leaving the euro and getting back to their roots, the drachma.  Spain and Italy to follow shortly thereafter.  And tourists from productive, strong currency countries may rejoice-Greece, Italy and Spain will be the best vacation values since the 70s.

bank guy in Brussels's picture

Re Greece, and Bruce Krasting's question about the Tim Geithner meeting with German Finance Minister Wolfgang Schaüble, John Ward's 'The Slog' says it involves the US taking over the Greek 'bailout', and the bribing and buying of the Greek politicians, with a more generous offer than the Brussels troika.

The Slog says Geithner has offered the US as Greece's economic 'saviour' after exiting the euro, for several reasons:

- preventing Greek default and euro-exit contagion to US banks
- using Greece for not only its mineral wealth, plus Greek oil that can be drilled in the sea ...
- using Greece as a new American central base for the Middle East ... in conjunction with Israel and with Greece being much bigger and better ...

Fascinating stuff, and Ward seems to have a lot of sources and detail - here's a recent piece of his about Geithner's efforts to 'buy' Greece from Europe:


Haager's picture

I have no clue who did the thumbs down on that, but that guy can't have an argument.

First of all: The notion is obviously true, whe must understand that this is an offer from Geithner to Europe, and it is yet to be accepted. I don't think it will be accepted, Schäuble has obviously answered "No!".

Greece is not able to maintain its debt alone, so defaulting or a haircut is a necessarity. That fact was also reality long before the elections. Question: Why didn't they simply allow Syriza to win, as a default/haircut was inevitable no matter who wins?

The position of Greece near the borders of Africa and the ME is also of importance for Europe.

The US view on  "Owning" Greece could lead to more control over the region and would allow to let the affairs in Syria calm down, preventing to stack lots of costs with an unclear timetable  (does anyone have noticed the similarity of "Syriza" and "Syria"?) for gaining more control.

Turkey does seem to be apart, but consider that Turkey tried to blackmail Europe with running wild on Syria. Turkey does want to be part of the EU but is up to now rejected as a full (trusted) member. Turkey also doesn't have much credibility in the eyes of China and Russia, let alone Iran. The outstanding balance of It's economy is mainly due to the position as an axis whithin Europe and Asia, so goods, oil, gas and most importantly water are transferred through Turkey. 

Europe will try to continue its hold on Greece, and it will try to act against the blackmailing of Turkey (as a proxy). Some EU grands would love to make Turkey an EU-member under harsh conditions and with a spread of  the Greece debt, burdened on Turkey, but that's not going to happen unless the EU accepts Russia as an ally, forming the Eurasian union.


Arkadaba's picture

Interesting perspective and worth a read.

Dan Duncan's picture

Bruce, you'll have more luck parsing meaning from a Tiger Woods or A-Rod press conference...

"We need to give 110% because our backs are against the wall.  At the end of the day, it's all about commitment and dedication.  We need to focus on staying in the moment."

Madcow's picture

On the energy call - another explanation would be that connected finacial intersts know the price of energy is going DOWN - and need to trick investors into taking the long position.

Things sure get complicated when the referees are out on the field scoring points. 



lindaamick's picture

Another rationale for the comment relating to higher fuel prices in the midterm could be upcoming WAR.  BIG WAR.

It is a known historical fact that owners of society believe a good war brings about economic improvements. 

At the very least war will divert the spotlight of blame for current economic disaster from the corporate owners and it could whip the proles into nationalistic ferver over some single objective.

AlmostEven's picture

And to lift this article from possibly far-fetched to "very likely", Goldman Sachs (Draghi's former...or current?...employer) today issued a "go long EUR-USD" call. La pump to be followed shortly by La dump.

alien-IQ's picture

Bruce I think you are reading too deeply into the words of professional liars.

Nothing they say can be trusted and very little, if any of it, is ever true.

the right answer is usually the most obvious one. Forget his words and trust your gut. In the end, math and logic will prevail and each country will do what's best for them and not some beurocrats dream of a unified currency.

GoldmanSux's picture

This is an outstanding post. Many ideas presented here will possibly become mainstream in a few weeks.

mkhs's picture

What is the point in over thinking anything Draghi says?


Some "great leader" said something like when it is serious, youi must lie.