Harken back about a month ago, when the ECB Chairman Mario Draghi came out some bold comments about future action, including ‘We will not let the Euro fail’, and ‘We will do whatever possible to fix the problem – believe me, it will be enough’. I take this man at his word. Did Draghi have to come out with this ‘new’ language? That was rather risky, clearly speaking on behalf of the ECB and nobody else. But, if you look at his body language, his eyes and his stern look – you can just tell how serious he was. In a region ruled by consensus he seemed confident enough that he had all the support needed.
Draghi is a man who moves with bold steps when he talks and does not tend to waffle, unlike his predecessor Jean Claude Trichet. Oh, sure he’ll make vague comments that are mostly a mouthpiece of the euro-zone leaders but he truly is bent on solving the problem. In this way he exhibits many of the same characteristics of our Fed Chairman Ben Bernanke (for better or worse!).
Recall the week after his comments was the ECB meeting on policy, and boy was everyone disappointed when there was no cannon blast. You could hear the crying from Germany to California – why nothing? But to expect some action to happen at the point was rather foolish and the market knew it, selling off hard the hype and anticipation from the prior week. Monetary policy is a gradual process with effects not felt for months. Years ago former Fed Chairman Alan Greenspan once noted that rate hikes/cuts take more than six months to start seeping through the economy.
The euro zone leaders find themselves in a precarious and unprecedented position. The economies within the region are large enough that any failures (even by Greece) can cause severe damage around the globe. Prior defaults like in Argentina, Mexico, Asia and even Russia had only a modest negative effect but then everyone just moved on. The rhetoric from the group within sways from what is morally right, politically correct and downright ethical. One would think everyone from Schauble to Merkel to Hollande would get on the same page and squawk about the same problems and solutions, but that is elusive.
So, what does Draghi have in mind? I think that is subject to a work-in-progress, the pressure supplied depending on how the situation resolves organically. Recent talk of interest rate caps will serve to ease the fear and hence volatility in markets. So far however the euro currency is not being seen at risk and neither the dollar, perhaps the market believing the region will grow out of this problem faster than providing the painful medicine of easing, bond buying or even bond issuance. One thing is certain – Mr Draghi will not let this currency or the euro zone go down without a fight.