Walking a tightrope suspended 40 stories above the ground without a safety net was a tremendous feat, but bringing the ECB to a genuine quantitative easing program will be nothing short of miraculous. In yesterday’s grist from the rumor mills, Reuters reported ECB President Draghi will meet intense resistance in his effort to “do whatever it takes” to secure the EURO currency and economic growth in Europe. It seems that at least 12 members of the ECB are angry that Mario Draghi promotes stimulus plans that the ECB governing group has not sanctioned. (I’m talking about the famous “no taboos” speech of July 2012, as well as his speech at Jackson Hole this summer where he promised to prevent the onset of deflation.) The problem for Draghi is that many of the world’s central banks are moving ahead with aggressive stimulus plans while the EU provides jawboning but little action.
Time is running out for the ECB and Mario Draghi as BOJ Governor Kuroda’s new and improved QE efforts have placed greater pressure on European monetary lethargy.
If Mario Draghi has trained for this high-wire act he will have to push back against those who oppose a genuine QE program. The rationale is simple for the ECB president:
“While members of the ECB board have concerns about my speeches about deflation and the need to execute a vibrant QE program, think back to July 2012 when yields on Ireland, Spain, Italy, Portugal, Greece were soaring in fear of European insolvency.
As we are aware, yields on EU sovereign debt have dropped dramatically as all the aforementioned nations have seen their borrowing costs drop under 1 percent. I remind the ECB board that we have actually spent little currency in this effort as our balance sheet has shrunk over the last two years while the Japanese and Americans have increased their holdings by vast amounts. I remind my fellow policy makers that I have done what a good central banker is required to do: Buying time for the authorities to provide the needed solutions.
But our time has run out and more action is required. While we at the ECB have bravery tried to meet our mandate of price stability, the world has dramatically changed. Global growth is slowing and deflation within our domain is a real possibility. The BOJ has launched an aggressive program of QE, which has caused the YEN to weaken against the EURO. The U.S. Fed has ended its bond buying program so it is time for the ECB to fill the void. If the ECB fails to act then the EURO will appreciate against many of our trade competitors and the locomotive of European growth. Germany will also be negatively impacted.
I will remind the ECB board that many of our member states are politically pursuing an agenda of a weaker euro and it may well be within the legal bounds that the European Council of Finance Ministers (ECOFIN) seizes the authority over the euro currency and directs the ECB to weaken the euro. I implore the ECB to act to initiate a substantial QE program–NOW.”
This is the statement that Mario Draghi ought to give for time has expired in the face of BOJ and RIKSBANK actions of last week. If Mario fails to have the intestinal fortitude, the EURO will rally and the European equity markets will weaken. Being a tightrope walker is difficult work. Mario, hopefully you have prepared for the task at hand, and, unlike Nik Wallenda you have not done this blindfolded but with clear vision. The ECB announcement is at 6:45 a.m. CST with a press conference to follow at 7:30. Be patient and let the markets react before you enter the fray.