“Great is my dismay!
Spirits raised by me
Vainly would I lay!”
I was reminded of these words from Johann Wolfgang von Goethe’s “The Sorcerer’s Apprentice” as I listened to Mario Draghi’s announcement on Thursday and watched the euro being driven higher as the DAX collapsed. I expect that the strength of the capital markets’ reactions to his speech surprised even Draghi himself. He will probably think he has “learned” from this, and it likely won’t be too long before he backtracks and announces a further escalation of the ECB’s quantitative easing programme.
The madness of Draghi’s monetary policy, a policy he is widely celebrated for, is a one-way street that leads to a dead end. The markets react to the ECB’s cheap money like drug addicts chasing an ever-stronger fix. The fact that Draghi has left the monetary floodgates wide open is no longer enough to satisfy the markets. Even confirmation that his insane policies are to be extended for a further six months – until at least March 2017 – was not enough for the markets. The market had been expecting a massively expanded quantitative easing programme from Draghi, potentially up from €60 to €70 billion per month.
The disappointed reactions show that it will simply not be possible to return to normal monetary policy any time soon. One can only imagine what would happen if the ECB implied that it was thinking about slightly reducing its bond buying programme, or, heaven forbid, bringing it to a close. When the markets reacted with such bitter disappointment as Draghi failed to deliver the expansion and extension they had hoped for, the insanity of the central bank’s policy was clear for all to see. So, there’s to be no substantial change to monetary policy, and meaningful interest rates remain a thing of the past in Europe. A situation which will only serve to add further fuel to the real estate boom.
The euro rose more on this single day than it had on any other day over the previous six-and-a-half-years. Despite this, I don’t see any prospect of a long-term comeback for the currency. In the long-run, the euro is going to become even more irrelevant. The events of Thursday pale in comparison with what happened two days earlier when the International Monetary Fund reviewed the composition of its XDR currency basket, the weighted basket of the world’s most prominent currencies. The Renminbi (Chinese Yuan (¥)) is being added and will make up 10.9% of the basket, while the euro is being reduced from 37.4% to 30.9%.
The long-term decline in the euro’s importance is also evident when one looks at the proportion of euros held in central banks’ currency reserves – the euro has fallen from 28% at the end of 2009 to as low as 20% today. The euro’s share of international remittances is a further indication that the single currency’s significance is slipping, having fallen from 44% in 2012 to a new low of 28% today. At the same time, the dollar’s share has risen from 29% to 44%.
I think that these developments will continue, despite the considerable short-term gains made by the euro as a direct reaction to Draghi’s words. Draghi will “learn” from his speech: He will accelerate his ultra-loose monetary policy and make sure to signal this fact to the markets at the earliest possible opportunity. And what about me? I’ll be sticking with the dollar.