SacroMacro

A disagreeable blog about Finance

The melting down of Euro – Part 1


It was 26th of July 2012. In a few days exactly 10 years will be between us and the historic “Whatever it takes” moment in which Mario Draghi, the then sitting president of the ECB, single-handedly dispelled the fears cropping up around the unified European currency. In the process, he saved both the currency, and Europe as a monetary union.

A lot has happened since then, to Europe and the Euro, and although most of it was bad, I thought celebrating this 10-years mark would be a good way to start a blog about Finance. To talk about the credibility of the Euro, a currency which was at some point considered a pretty decent store of value. 

And the manufacturing of its undoing.

I apologize if this series might come across as a heated rant, but as someone who lives in Italy, for the better or worse, I see my life priced in Euro. So this is kind of personal.

Down it goes!

Just in case today you got up wondering what it’s like to look at sheer terror right in the face, here is an artistic rendition of it:

Last year of trading of EURUSD. It looks bad.
That little bounce down there.

Now, this is supposed to be a Finance blog which teaches stuff. I want to start on the right foot. So here is something: almost every time a chart points downward, in Finance, that means trouble.

You are looking at the latest 12 months of trading of EUR against USD. The price action is unquestionable.

Well, first of all, congratulations to those who got early in the trade of the decade. It has been a long year of steady gains for you euro-bears. 

A full year of price action provided exactly zero entry opportunities. In hindsight, entering at any moment would have proved to be a good entry. In my defense, one whole year of monetary policy ago, very few would have bet on the steady flow of fuckups that was instead brought about. But who did what? And why?

So let’s meet former and current sitting presidents of the ECB:

Mario Draghi and Christine Madeleine Odette Lagarde, a one-picture summary.
Mario Draghi and Christine Madeleine Odette Lagarde, a one-picture summary.

Who are these people? Well, we are looking at the architects of what could become the undoing of the unified currency. But let’s take one step at a time. There’s no rush. The currency is already threashed anyway.

A foreword: I am not here to call shame on these people. I mean, their qualifications are spot-on. I doubt most people in their chair would have been able to perform better. And it’s not only bad ideas that were put in action. I already mentioned the historic Whatever it takes moment that went down to being the boldest display of massive balls in recent history. So who am I to criticize right?

Well, for starters I personally own Euros too. Whatever the ECB does, it affects me. So mine is a good enough platform. 

The ECB is a Central Bank. The way it should act is coded and it should never deviate from its mandate, which is – and I quote – price stability within the Eurozone. This “price stability” constraint has been then formally defined as 2% inflation YoY, with some leeway to let it over or undershoot, but on average the ECB should be laser-focused on a 2% average. 

And yet the way the ECB has been (not) acting, its complete complete lack of aim and inspiration, bothers me. I mean it really irks me. I’m literally mad at them.

COME ON DO SOMETHING!!

We are now well above 10% of “reported” inflation YoY in some EU countries, and please let’s mention that of course this number is an outright lie: if the ECB or the FED were to report “uncooked” inflation numbers, without being able to tweak the way inflation is reported via the CPI, that would cause planetary-scale panic immediately. Real inflation is much, much higher than what is being reported.

But despite that, the pulse of the ECB is completely absent. No brain activity at all. No signals, no commentary. They weren’t even able to spin a single lie to save apparences.

ECB has simply decided to abdicate from its role of monetary regulator. That happended years ago, when they left the unified currency to rot. Why?

The wall of worry

But Sacro” you might say “let’s cut them some slack, the EU has been subject to all sorts of troubles lately”.

Oh yea, true.

But this is finance. There will always be a hot mess calling for more monetary easing. Always. 

But I grant you that. EU has been beaten and bruised more than the rest of the world lately. So let’s look at what is within the Wall of Worry for the EU:

  1. Coming number one, the COVID crisis and consequent relief package, then followed by 
  2. the not-so-proxy-anymore war to Pootin
  3. then consequent worsening of the energy assets shortage, which can now be upgraded to
  4. the Goddam Everything shortage
  5. and coming in last, the Green Economy respin, consequence of this total energy fuckup.

I wanted to point out this list not only to satisfy my sadistic urges, but also note that no item is more than a couple years old. The COVID thing being the elderly one.

And yet, as a matter of fact, the ECB was championing uber-ultra-easy money policies way, waaay before 2020. Actually the ECB has supported negative interest rates since 2014. And, consequently, the Euro currency has been thrashed since then.

Let’s review the effects of this wise thing, in the next part of this series.