It seems that Mario Draghi has taken the stance that he can hold off doing any further QUANTITATIVE EASING (QE) as he waits for the policies of the British, Japanese and the U.S. to generate enough growth to allow Europe to muddle through its problems for the next few years. President Draghi seems to believe that if the global economy can achieve a growth rate of 4% or more it will buy time for Europe to begin to correct some of its problems and at least put a halt to its economic downturn. The ECB has accepted the slide in the YEN in the hope that stimulating Japanese growth will alleviate some of the stress of the global economy. The Japanese economy has been a laggard for the last two decades, give or take a year here or there, and it was able to muddle though based on the growth of the rest of the world.
Since Draghi raised the issue of “doing whatever it takes,” the EURO and European debt markets have rallied without any real action on the part of the ECB. So much so that some of the previous QE, the LTRO money, has been repaid removing some of the stimulus. The ECB wants to hold its powder for in case of a political situation that actually forces President Draghi to undertake an Outright Monetary Transaction (OMT). The German elections are scheduled for September and if the EU can muddle through this period and not be forced into any drastic action, it will keep the Bundesbank hard money crowd from attacking Chancellor Merkel. If Europe is to attempt a genuine effort at resolving its present malaise, it will need Frau Merkel at the helm in Germany.
As the ECB meets on Thursday, some analysts are predicting that Draghi will push some type of rate cut in order to weaken the EURO. From my perspective Draghi seems content to wait. He will need to see some resolution on the Italian election and being that the Italian and Spanish debt markets have steadied, there’s no need to rush into action. Reuters reported that European auto sales have softened again as registrations fell 8.5% in Germany, 12% in france and 17% in Italy. This is not new and pales in comparison to the problem of rising unemployment. If the world is willing to keep the European bond market steady and the euro on hold then there is no cause to irritate Bundesbank President Jens Weidmann. Let the rest of the world do the heavy lifting.
The world is not in a risk-on, risk-off paradigm as the equity markets rally even with a stronger U.S. dollar. Yes, Mario:
Time is on your side,yes it isNow you can always sayThat you want to be freeBut you’ll come running backYou’ll come running backYou’ll come running back to me