What will the ECB decide?Mario Draghi’s doubts

The year 2013 has been the year of quantitative easing. The major central banks tried to pull their economies from recession by introducing more liquidity while de-valuing their currencies. However, in this dangerous experiment one central bank was left behind, the ECB. From a technical point of view this can be easily seen by an appreciation of the euro against all its counter parts. In my personal opinion inflating the economies and devaluing currencies is not the wisest thing to do, however, in our global economies one needs to play according according to the rules of the game and rule number 1 has been “Print as much as you can”.

A direct consequence of ignoring this rule is something feared by most debt-rich countries, Deflation. In a previous article I discuss the consequences of inflation and deflation, I recommend you to check it out.  But why the ECB, and in particular Mario Draghi, are so stubborn and keep avoiding stimulus?They will tell you that they don’t see the efficacy of stimulus, and they are right. We already know that banks are not really connected to the real economy and they would use “cheap money” just to buy debts from big companies and central governments, therefore only the rich class would benefit from it. But there is another problem that unfortunately is not always discussed, from a financial point of view the eurozone is some sort of Frankenstein. A monster with the heart of an athlete (Germany) and the body of  an old man (southern europe). Therefore, while other central banks have only one economy to monitor, the ECB has to apply the same measure for both healthy and sick economies. It is clear that the economies in southern europe are shackled by a rigid system that is draining liquidity. Liquidity that is concentrated in the northern economies that prosper and can afford to fear inflation more than anything (I don’t think in Greece people even remember the meaning of the word inflation). But inflation comes with growth, and this in Europe is still a “mirage”. In each monetary policy meeting we keep hearing Mario Draghi saying that he has many tools at his disposal but so far he was not able to do anything. This is crippling the european financial stability because the markets are not pricing in any action from ECB and the value of euro does not reflect the real potential of the european economies (the euro is currently overpriced). This means that if one day the ECB will decide to intervene it will find the markets off-guard and we will see some panic reaction.  But it also means that for an extended period of time we will see deflation in europe. Unfortunately european economies cannot afford this for too long. So the question is, Mario what will it take?

Written by

Gianluca Fontana