“Whatever It Takes”: Act II :Scene I: Next ECB Meeting
2015 has been such a busy year for Europe’s politicians, what with Ukraine, Syria and Paris, that her Central Bankers have enjoyed a well-deserved break from the spotlight. But don’t bet on the same for 2016. Perhaps in the intermission between economic crises, some policy-makers may have browsed the predictions of the most important book written on political economy that was published way back in 1776? Not Adam Smith’s celebrated Wealth of Nations, of course, but Edward Gibbon’s Decline and Fall of the Roman Empire, with its prophetic warnings about the moral and physical decline in eighteenth century Europe’s populations and the rise of rival, aggressive societies on its borders, much as faced by Ancient Rome twelve hundred years earlier. Fast track to today, where our similar problems are heightened because the gatekeepers of European civilisation are the weakened economic border states of Greece, Italy, Spain and Portugal. Their ‘can of bad debts’ has been proverbially kicked down the road several times, but the deft Ronaldo-like boot applied by Europe’s bankers last time around in 2014 was enough to last a couple of years.
In the lead-up to the 2008 financial crisis and like many countries, Europe’s economies enjoyed the fruits of a huge credit-binge. All seemed to win, but once debt flows reversed only Germany has since seemed capable of sustainable growth. In a no-Schengen World and with sluggish business activity rates outside of Europe and deep pending political questions being asked from Cameron’s Brexit to Merkel’s future, the risk in 2016 is that Europe’s economic and political crises converge into one all-embracing big bang that destroys all confidence in the Euro. The Euro’s future seems more-and-more tied to Schengen and the refugee crisis. Yet for us the Euro question has never been a question of the currency’s integrity – we figure the political centrifuge is too great – rather of its level. Enter ECB Governor Draghi and Act II of his Whatever It Takes to save the Euro. With Germany now on the back-foot over the refugee crisis, the ECB may be encouraged to undertake a still more radical debt monetarisation programme, carefully scripted to sound like a continuation of QE-lite.
Set against the backdrop of the strong US dollar and the skidding Chinese and Asian economies, it would seem anyway reasonable that the Euro should weaken. But adding in this larger QE boost to arrest the mounting domestic economic and political problems, there is a compelling case for an even sharper fall in the Euro. Dollar/ Euro of 80 cent anyone?