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A Hint From Draghi on the Euro?
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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Agreed. Though I would add the he'd have to eat loudly, pretending to talk as he does so.
"Mmreewrerem rrefsssferer m mklsefmm mkfkewrkower."
*BELCH*
Gotta have some sort of sound-byte to talk over, you know.
How about:
A discussion on ZH about the construction and intent of the EUR is long overdue.
Specifically, the reason why they list the first reserve on the ECB's books first, and why they mark it to market every quarter.
Don't hold your breath though.
I would normally agree, but you were the second person to respond to my comment... And your handle indicates we are of the same mind.
Would you care to start it off?
To have another basis currency for international trade and the SDR basket. Since you seem to have knowledge or opinion on the subject, what can you share?
Thanks MP,
For starters, the EUR is a supra-national currency, with no single nation in control of the issuance of currency (BIG difference between the ECB and the Fed, although it's clear the Fed is in collusion with the big banks).
Also, it uses the market price of gold to calculate it's reserves, with which it lends against. This gives it an enormous advantage over both a debt-based and a gold-redeemable currency.
This also has the effect of limiting the ability of any one Eurozone member from issuing unsustainable debt (Greece, Spain, et. al. are running up against this market limit right now).
This has the effect of in the long run, making the EUR the most stable of all transactional currencies in the world.
The USD could do the same, but to try and adopt the EUR model, it would create a price shock in gold (and the USD) that TPTB are clearly trying to avoid.
This IMO will result in the EUR becoming (at least in the West) the transactional currency of choice. Not a great store of value (unless you buy stable EU nation bonds, depending on the larger environment), but a superior medium of exchange than other currencies (owing to it's wide acceptance and greater stability).
BTW. how much for Piggy for the night? Nothing too weird (puppets are already plenty weird enough). ; )
btw, recent events have shown that Draghi is NOT the undisputed master of the ECB.
A quick reminder on the composition of the "Ruling Council" that votes on ECB policy - all direct national political appointees in the second block:
Mario Draghi - President
Vítor Constâncio - Vice-President
Jörg Asmussen - Member of the Executive Board
Benoît Cœuré - Member of the Executive Board
Peter Praet - Member of the Executive Board
Luc Coene - Governor, Banque Nationale de Belgique
Jens Weidmann - President, Deutsche Bundesbank
Patrick Honohan - Governor, Central Bank of Ireland
George A. Provopoulos - Governor, Bank of Greece
Luis María Linde - Governor, Banco de España
Ardo Hansson - Governor, Eesti Pank
Christian Noyer - Governor, Banque de France
Ignazio Visco - Governor, Banca d'Italia
Panicos Demetriades - Governor, Central Bank of Cyprus
Yves Mersch - Governor, Banque centrale du Luxembourg
Josef Bonnici - Governor, Central Bank of Malta
Klaas Knot - President, De Nederlandsche Bank
Ewald Nowotny - Governor, Oesterreichische Nationalbank
Carlos Costa - Governor, Banco de Portugal
Marko Kranjec - Governor, Banka Slovenije
Jozef Makúch - Governor, Národná banka Slovenska
Erkki Liikanen - Governor, Suomen Pankki
"A discussion on ZH about the construction and intent of the EUR..."?
Just wrote something along those lines here http://www.zerohedge.com/news/feds-gold-being-audited-us-treasury#commen...
to make it short: the EUR is Nixon's child/fault/result of his actions.
btw I agree on your view of the intent of making it, in the long run, "the most stable of all transactional currencies..."
though IF the FED would try and adopt the EUR model - that is nothing else than a modern variant of the old, (pre-1971 FED fiat) classical central bank model) - then the EUR would shine less... fat chance for that, it's about as likely as the repatriation of the european gold from NY-FED's basements
Agree, but I think it's too late to do that in an orderly fashion at this point.
They need to turn their guns around and point the other way, but it's too late...
That comment that you wrote http://www.zerohedge.com/news/feds-gold-being-audited-us-treasury#commen... is IMO brilliant, BTW. I highly recommend everyone read it.
Golden SDRs?
Issued out of the Central Bank, possibly?
"[Draghi] also confirmed (to me) that there ways no 'Euro breakup' in his mind when..."
That's some pretty good access, Bruce. Keep us posted.
Bruce has numerous contacts no doubt but I don't think he was talking about actually speaking the Draghi.
I think his "(to me's)"="in my thinking on this issue". That is how I perceived it but I could be wrong.
Interestingly, none of you (except perhaps LawsofPhysics) have even attempted to address the point I brought up.
I think that the centralization and expansion of economic power in the hands of an unaccountable oligarchic elite (a la the US Federal Reserve) sums it up pretty well, no?
Not really, although I agree that it sure seems that some are are trying to do that with the Euro-parliament. IMO it is a futile distraction (and perhaps that is for the best).
The ECB however, and the EUR is another matter. Despite dangling a tasty bit in front of everyone, which was: A discussion on ZH about the construction and intent of the EUR is long overdue. Specifically, the reason why they list the first reserve on the ECB's books first, and why they mark it to market every quarter.
Here's a big hint: The first item on the ECB's list of reserves is gold.
Why don't you write an article regarding the construction and intent of the EUR?
I'd rather do it in a discussion format, so scroll down a bit or click here http://www.zerohedge.com/contributed/2012-08-02/hint-draghi-euro#comment...
Oh I assumed it was because you only get paid to post in comments, rather than present your opinions in article format.
OK Bruce, upon further reflection, maybe Spain is exiting the Euro and they will struggle with fuel costs due to the devalutaion of their currency.
Hence, "and it certainly will be enough"(or similar) from Draghi.
Hence, no formal request for bailout by Spain.
Hence, JPM rec of short Spanish Bonds on a Friday.
Hence, Turbo Tax timmy visit this week to Schauble to discuss.