ECB lining up dramatic action to save the Euro – but slowly
The next few months will be decisive for the Euro. More failures over taking decisive action by Eurozone policy makers risks seeing the single currency spiral to parity with US dollar and break up all together. This dilemma has made Mario Draghi, President of the European Central Bank the man of the moment. Two weeks ago he said everything would be done to save the Euro and last week he appeared not to be living up to those bold pronouncements.
But actually it was more a case of the markets getting ahead of themselves and failing to understand the circumstances in which the ECB has to operate. Reading between the lines there is a strong determination by Draghi for the ECB to do its bit. Clearly the growing financial crisis in Spain and Italy must be contained as failure to do so would mean the end of the Euro.
But Draghi has his hands tied. Unlike his counterparts at other central banks, such as the US Federal Reserve, the ECB is managing a currency, which has no single state behind it, but instead a collection of sovereign states with democratically elected governments. So for instance, there is no shared fiscal policy as you have in the US and the UK. That means reaching a consensus takes a lot longer, hardly ideal in the middle of an escalating crisis. Financial regulation is also carried out on a country by country basis.
The second issue is that the ECB mainly has an inflation fighting mandate modelled on the German Bundesbank and has stricter rules than the Fed or the Bank of England over how it can deploy monetary policy. The latter two also have mandates to support economic growth.
Arguably this means Draghi has the most difficult job in central banking. But behind the scenes he seems to be driving a consensus, mainly to get the inflation-fearful Germans on board so the ECB can exercise that bazooka every one keeps talking about. A compromise appears to be forming around using the Eurozone's bailout funds, which would come with strings attached for the recipients so they're not seen to be getting a free ride, that in turn would be aided by the ECB's theoretically unlimited fire power.
It looks as if the cavalry is on the way, but traders should keep their expectations in check. So far the Eurozone authorities have serially underwhelmed in terms of taking action to save their currency. And a crucial date in the Eurozone saga is September 12 when the German Federal Constitutional Court decides whether it is legal for the European Stability Mechanism to help bailout struggling Eurozone countries and over a Eurozone fiscal pact. The Euro is likely to be buffeted by strong bouts of volatility as these various hurdles are negotiated and as expectations are either met or dashed.
Traders taking positions in the Euro should pay extra attention to money management and maybe only look to take short-term trades as the direction of the single currency is impossible to predict given the range of factors effecting it at the moment.