FX MONETARY POLICies
Crucially, too, it was the SPD that whitewashed the actions of Mario Draghi, the Italian banker who had become president of the European Central Bank in early November 2011. Mr. Draghi went far beyond his mandate in the massive indirect buying of Italian and Spanish bonds that so dramatically ended the bond- market crisis just weeks after he took office. In effect, he turned the ECB into a lender of last resort for governments.
But Mr. Draghi’s brand of quantitative easing had the great merit of working. Expanding the ECB balance sheet put a floor under asset prices and restored confidence in the entire European financial system, much as had happened in the U.S. in 2009. As Mr. Draghi said in an interview in December 2011, “The euro could only be saved by printing it.”
So the European monetary union did not fall apart, despite the dire predictions
of the pundits in late
2011. On the contrary, in 2021 the euro is being used by more countries than before the crisis.
As accession talks begin with Ukraine, German officials talk excitedly about a future Treaty of Yalta, dividing Eastern Europe anew into Russian and European spheres of influence. One source close to Chancellor Gotha-Dämmerung joked last week: “We don’t mind the Russians having the pipelines, so long as we get to keep the Black Sea beaches.
46 FX TRADER MAGAZINE January - March 2012 CONCLUSION:
Unbalances - more than rules enforcement - is the real problem
Before concluding it is worth stepping back and looking at the lead up to the Euro and showing the substantial and persistent devaluations many countries saw in the years leading up to the single currency. Was it really ever realistic to think that the competitive differences between so many diverse countries could be solved by the narrow confines of Euro membership? Have countries made any efforts within the single currency to change trends than dominated in the prior decades? To get a picture of just how difficult
it was always going to
be to integrate 12 countries with diverging economic characteristics (let alone other social, political and language differences), have a look at this analysis from Deutsche Bank showing the level of devaluation seen since August 1971 (the point the Gold
100 120
IEP
NLG GBP
BEF ESP
Standard was abandoned) against the Deutschemark for the eleven other EU 12 countries plus the US and the UK for comparison.
So, in the three decades leading up to the introduction of the Euro, significant and continuous currency adjustment was needed for the vast majority of the members of the EU-12 against Germany. Unfortunately, the evidence since the Euro was introduced is that the competitiveness of all of these countries
vis-a-vis Germany has
continued to deteriorate enough to suggest that further significant devaluations would have occurred, had the Euro not been put in place, thus leaving pressure points to varying degrees of intensity for all member states. The previously shown work from Nomura is quite eloquent in this sense.
Figure 6: Eurozone Currencies vs. DEM since August 1971 (end of the Gold Standard) ATS
LUF ITL
European policy-makers have been reluctant to concede that the eurozone is institutionally flawed. Even now, many assert that the crisis is not one of the eurozone
FRF PTE
USD GRD
. Rebased at 100 in Aug 1971 FIM
20 40 60 80
0 Aug 71 Source: Deutsche Bank , GFD Fair value estimates for new national in a eurozone break-up scenario Aug 79 Aug 87 Aug 95 Aug 03 Aug 11
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