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​Euro-Catch 22: Mario Draghi’s woes over QE

Patrick L Young is expert in global financial markets working in multiple disciplines, ranging from trading independently to running exchanges.

Published time: April 08, 2014 08:39
Mario Draghi, President of the European Central Bank.(AFP Photo / DanieL Roland )

Not only is the eurozone economy festering, even the ultimate in Quantitative Easing may prove an entirely poisoned chalice.

A tricky financial problem has arisen which is so surreal that if we are not careful we could be swept up in a certain spirit of sympathy for the banking genre. At its core we have a suave, debonair, elegant hero.

However, while being perhaps the Central banking answer to Marcello Mastroianni, sympathy may fade upon recalling that this man has worked for the great vampire squid itself, Goldman Sachs. Nevertheless, ECB President Mario Draghi is an urbane figure who sits at the epicenter of this fascinating financial morality play.

Amongst his notable outbursts, Draghi famously remarked that he was willing to do “whatever it takes” to save the euro. This appeared to work magic on investors, who often seem spellbound when central bankers speak their hocus pocus and deliver alleged miracle cures which often appear like bald quackery.

Central bankers wear their superiority complexes with a certain panache. This is, in itself, rather at odds with their achievements. The latest banking crisis was hardly helped by their running a multi-year fiesta of low interest rates – akin to pushing partygoers’ heads into the punchbowl to help them ingest more booze.

Central bankers’ cure for the post 2008 hangover was a more powerful stimulant to the already heady cocktail: Quantitative Easing; that odd phrase which basically means printing money.

While popular overseas, eurozone QE was restricted to some technical programs, modest nuggets of ‘funny money’ lest German sensibilities were upset. Teutonic DNA remains traumatized by the horrific hyperinflation as the Weimar Republic melted down, paving the way for the Third Reich.

Nowadays, given the fundamental flaws of the Euro (a currency without an underlying political system to ensure fiscal responsibility), the fact that the Euro still exists at all, is a tribute to Draghi’s innate talent...or sheer bloody mindedness (“whatever it takes”). However, now Draghi’s marvelous bravado leaves him with a fascinating, and frightening, dilemma.

AFP Photo / Damien Meyer

Last week ‘Super Mario’ (the financial press fawn over central bankers with a certain ironic gusto) emerged from an ECB Council meeting to announce that finally the ECB was edging towards perhaps deploying a full QE program.

As Britain, America and even Japan, amongst others, printed money with alacrity, the euro has, despite its broad range of fundamental maladies, actually increased in value! This has impacted on Europe’s export competitiveness, at a time when nations like Greece and Spain are still teetering somewhat on the cusp of economic survival. Therefore, faced with an overvalued currency, 12 percent average unemployment and, at best, economic stagnancy...well maybe it is time to do “whatever it takes.”

So is Mario Draghi’s finger poised over the red button to activate the money printing presses?

Actually, Super Mario faces an incredible dilemma - damned if he does and damned if he doesn’t. To work, QE must trickle into the real economy. Even in UK/US schemes, often the cash has remained stubbornly within the investment world chasing paper assets as opposed to invigorating the manufacturing and service economy.

Within the EU the problem is not just this trickle down aspect. Rather vital issues with the banks themselves have not been addressed. Put simply: the political class remain in denial at the extent of banks’ problems. Many EU banks may fail the autumn round of stress tests. Gutless eurozone governments have palpably failed to take control of the economic situation, wrapping bandages around vast festering wounds.

Thus throughout the eurozone, there are many zombie banks, de facto insolvent entities being protected by stubborn (scared) politicians. These walking dead institutions are not merely in the depressed Mediterranean nations with rampant unemployment, they even exist in Angela Merkel’s otherwise prosperous German hinterlands. Given how she has sought to ‘punish’ incompetent governments, her hypocrisy in punishing other citizens (e.g. in Ireland) to protect her banks is rather incredible. It also threatens the long-term survival of the euro, let alone the EU.

Mario Draghi faces a genuine Catch-22 situation. If he launches QE it may reduce the euro in value, but at the same time, even by the standards of QE, his ability to pump prime the economy through a trickle-down effect through the banking system is very modest. A massive tsunami of freshly minted euro might simply end up propping up zombie banks which need to be closed.

Pity the poor banker, for whatever he does.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.

Comments (8)

 

Emmett 18.04.2014 12:49

Dutch guy 08.04.2014 11:00

Golman Sachs was one of the major players in creating the last financial crisis. The fraudulant part would be the introduction of swaps on derivates. These were used to multiply debts on for instance Greece.

  


An d Goldman Sachs is one of the major players in creating the current financial collapse. They are criminals but when criminals are not prosecuted for past crimes they have no incentive to stop committing new crimes especially when they profit from those crimes.

 

DoAskDoTell 10.04.2014 18:18

Debt = Wealth (current dollar hegemony)

How is ALL debt created? ... dead silence... (for example QE printing press of IMF/ Fed/ ECB gangsters o.t. univ.) LOL

Hint: creating currency to extinguish debt is absolutely NO different from the creating of the debt... LOL

... as long as you own your country and your *national* bank/treasury/govern ment (no puppets serving the masters o.t.uni)

Secret: IMF/Fed/ECB (so called "investors" ; like Goldman Sachs)are *drug pushers* looking for easy greedy victims to enslave LOL

We need to have a new regime to take good care of our home ecology (culture, forest, species...)

 

Mark 09.04.2014 09:30

The collapse of the bond market is coming. It can be averted in Europe if Russia swaps it's dollars for Euros, pushing the dollar down, admittedly, but pushing the Euro up and making it possible for Europe to print some relief from the coming interest rate hikes which will again carpet bomb their banks. The advantage for Russia is reducing exposure to the policies of those across the Atlantic who would like to harm it, and increasing it's exposure to those in Europe who are in need of it's oil and gas.

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