For those who thought the euro zone had lost the power to liven things up, today should make you think again.
ITEM 1. The European Central Bank meeting and Mario Draghi’s hour-long press conference to follow. Rarely has a meeting which will deliver no monetary policy change been so pregnant with possibilities.
Draghi, the man tasked with becoming the European bank regulator on top of all his other tasks, will face some searing questioning on his time as Bank of Italy chief and what he knew about the disaster that has befallen the country’s oldest bank, Monte dei Paschi.
Ireland has given the normally imperturbable Italian another headache. A Reuters scoop last night prompted Dublin to rush inton presenting emergency laws to liquidate failed Anglo Irish Bank as part of a deal with the ECB to relieve it of annual payments in excess of three billion euros on money it was given to prevent its banking sector collapsing. The ECB has already rejected one proposal from Dublin and will no doubt be aggrieved at being railroaded in this way but there is a genuine will to get this sorted. The euro zone still needs a success story and relieving this burden would all but seal Ireland’s ability to exit its bailout.
On top of those two potential bombshells, Draghi will doubtless be quizzed on the strengthening euro – too strong France and others say, though not Germany. It’s probably too early for him to bite but if he did indulge in a spot of verbal intervention it would have a seismic short-term effect on the forex market.
The world’s top central banks are expanding their balance sheets by printing money, or at least not reversing course, while the ECB’s balance sheet is tightening, partly due to banks paying back early cheap money the central bank doled out last year. Neither does the ECB’s statute allow it to intervene directly to weaken the euro so it could well be the loser as others explicitly or implicitly follow policies that will drive their currencies lower.
But if it doesn’t act and the euro keeps going up, hard-won internal devaluations (that means savage wage and job cuts to you and me) in the likes of Spain and Portugal, and their ability to export more as a result, could be snuffed out by the foreign exchange market in no time at all.