Mario Draghi and the ECB extended their capacity for buying sovereign debt until December 2017 on Thursday, as expected, if at a slightly lower pace. Just at a time, when again, the future of the euro is being called into question, post the Italian referendum. The Telegraph on Wednesday focused on a speech by the prospective Italian Finance Minister, suggesting the best way to save the euro is for Germany to leave. He does go on however to discuss how Italy could also manage to leave, reintroducing the Florin alongside the euro.
We have often made the point in this blog that the only logical explanation for 10-year German Debt trading with a yield close to zero, whilst German equities currently offering a yield close to 4%, is the return of the Deutsche Mark. Should Germany be forced to reintroduce the Deutsche Mark, to save the euro, the rapid revaluation upwards of the currency would likely drive the German economy into a recession. Bond holders would profit owning German debt, now priced in a much higher valued Deutsche Mark, in theory anyway.
The lack of a unified fiscal policy within the euro-zone, which is one of the main reasons many quote as the major flaw to the euro, means Mr Draghi has limited other tools in his armory to stimulate the economy. As Jeremy Warner comments in the Telegraph, the problems for Europe all started with the euro. The introduction of which was designed to bring Europe closer together. He goes on to point out that the single currency has denied member states the normal market-based adjustment mechanism of devaluation to respond to the economic shock of the financial crisis. The idea was fine, the execution not so good, a currency without a government.
On the positive side, there are some signs the European economy is showing signs of recovery. Businesses and consumers are growing more upbeat, and lending is rising. Eurozone business activity grew at the fastest pace all year in November. The problem is unemployment remains high, and inflation well below target. The unemployment levels in Europe are almost unbelievable in such a developed economy, particularly amongst the young. No wonder there is so much unrest.
It is hard to fathom what the consequences on the global economy would be should the euro need to be restructured in some way. For that reason, this is a global problem not a European problem, and somehow one imagines all options will be explored to save it in its current form.