Can the European Central Bank answer the questions posed by the Arctic Monkeys?

As we enter the new year there is one number which stands out particularly in the world of foreign exchange and it is the 1.2044 of the Euro against the US Dollar. A side impact of that move for UK readers is that the UK Pound Sterling has risen to 1.288 versus the Euro which continues its steady march since, well March of 2013. If we return to the exchange rate against the US Dollar we have since the rate dip below 1.204 this morning which is significant in that it means that it is as low as it has been since June 2010. So the European Central Bank is showing signs of achieving the currency depreciation or falls that it has hinted it would like to see to help the Euro area recover. Although in a case of it not always being able to get what it wants the falls against the US Dollar are eroding some of the gains from the weaker oil price for Euro area consumers and producers. Also the ECB will not particularly want reminders that the Euro is lower against the US Dollar than for much of the Euro area crisis period.

Some Perspective

If we look back we see that the Euro has been falling since the middle of March 2014 when it nudged over 105 on an effective or trade-weighted basis. Once the ECB crunches the numbers today it will have edged back towards 98. This does coincide with the period where the ECB has resumed what I have called “Open Mouth Operations” of which more later. However there is still some distance to travel to get back to the level since in July of 2012 when 94.45 was seen, so the previous hard currency phase has not yet worn off completely.

For a total perspective it is intriguing that after all the headlines of it being a strong currency and then in crisis the Euro is at 98 compared to the 100 it started it. So we may have had a fair bit of volatility but the 100 tractor beam has pulled it back to the beginning several times.

There are two other types of perspective here. Firstly is this Euro weakness or US Dollar strength? Secondly those stereotyped as the Gnomes of Zurich will be looking closely at an exchange rate of 1.2022 for the Swiss Franc against the Euro as their plans for negative interest-rates do not seem to have decisively weakened it.

I read the news today oh boy

If we take the advice of John Winston Lennon we see that the ECB President Mario Draghi has indeed been making the news today in an interview with Handelsblatt.

The risk that we do not fulfil our mandate of price stability is higher than six months ago

We are in technical preparations to adjust the size, speed and compositions of our measures early 2015, should it become necessary to react to a too long period of low inflation. There is unanimity within the Governing Council on this.

If you were to play a word associated drinking game on ECB speeches and press conferences these days then please be gentle with whoever draws variants of the word unanimous! Also if you follow the phrase “Never believe anything until it is officially denied” I am sure that you will have already spotted that the ECB spends a lot of time these days denying that it has disagreements in its Governing Council. I am not sure why Handelsblatt feels the need to refer to itself in the third person but here is its summary of what Mario Draghi told it.

ECB President Draghi hinted in the Handelsblatt newspaper interview that the central bank could therefore start with the purchase of government bonds soon.

Whilst he was on the subject Mario Draghi decided to give us some further Forward Guidance.

Interest rates have long been very, very low – and this is likely to remain so for some time

Perhaps in the circles in which he moves he may have met some people who expect an interest-rate rise in the Euro area! Meanwhile in the real world there is quite a shortage of such people.

Also whilst many of you are no doubt wondering if there is a Plan A in the Euro area Mario Draghi also chose to echo the strategy of the (male) English rugby team

A break-up of the euro zone? That will not happen. That’s why there is no plan B.

Still we did know from the Six Nations that there is a core of rugby fans in Italy.

But we find ourselves concluding that we are seeing yet more “Open Mouth Operations” from Mario Draghi which begs a question I asked on the 9th of December. Is that it? He and the ECB are coming under ever more pressure to act and so far have mostly responded with a variant on what are called Jedi Mind Tricks. So far the real economy in the Euro area has proved as resistant to these Jedi Mind Tricks as Jabba-the-Hut.

What about ECB policies?

Here policy is supposed to already be very expansionary as we see very low interest-rates. For example the latest weekly refinancing allotted some 156 billion Euros at a mere 0.05%. Under the ECB is willing to go sub-zero there is not much else it can do here.

On the subject of what comes under the banner of QE or Quantitative Easing the ECB is proceeding at a snail’s pace. It made a big song and dance about Asset Backed Securities (ABS) but since November 21st has bought only 1.7 billion Euros of them. That may sound/read as a lot but in central banking terms it is not,especially in these times. If we move to its (third effort at) Covered Bond Purchases we see that it has bought some 29.7 billion so far. Thus we are a long way short of the promised extra trillion Euros.

The Euro area economy

This morning has seen the release of the final purchasing managers indices for manufacturing in December and if they are correct the malaise continues.

Downturns continue in France and Italy; German
output growth remains modest………..The average PMI reading over the final quarter as a whole (50.4) puts the manufacturing sector on course for its worst growth outcome since the current recovery started in Q3 2013.

Also the currently stronger economies of Spain and Ireland tend to follow a similar pattern to the UK which is seeing fading growth in this area.


We see that already in 2015 the Currency Wars theme has begun early, in fact about as early as it could! Some also think it significant that the Dollar exchange rates of the Yen and the Euro are at the cross-over point but I will leave readers to their own thoughts on that. As to the economic impact of the Euro fall I expect on a stand-alone basis it to be a boost but a modest one. Sadly as we look wider afield we see that it will erode the beneficial impact of the lower oil prices. Also no doubt the Swiss have already begun calling about the impact of the falling Euro on the Swiss Franc cap. Just in case their calls are not returned they set their move into the world of negative interest-rates to coincide with the next ECB policy meeting!

Should the ECB decide to step into the world of full-blown sovereign QE there are a multitude of problems that the media skips over. For example one central bank or if you like ring of power and 19 national treasuries is regularly glossed over and ignored. Also there is the fundamental issue of whether QE will have any impact on the real economy. when even Italy already has a ten-year bond yield of 1.82%.If that is the causal mechanism then it should already be working.

Perhaps the ECB has been listening to the Arctic Monkeys.

Are there some aces up your sleeve?
Have you no idea that you’re in deep?
I dreamt about you nearly every night this week
How many secrets can you keep?


20 thoughts on “Can the European Central Bank answer the questions posed by the Arctic Monkeys?

  1. Hi Shaun
    Hope you had a great holiday.
    Today its GBP that is falling against both the Euro and USD. Brent is continuing its downward trend, below $57.

    • Hi JW

      Yes I did thank you and I hope you and your family had the same

      You are right to point out that in the end the lower reading on UK manufacturing #PMI saw the UK Pound slip and slide away. Indeed as it fell by more than the Euro the headlines needed an alteration. In an irony perhaps the UK Pound was dragged down also by the falling oil price! If we go back to the Scottish referendum and project forwards a Scottish Pound/Dollar/Euro where would it now be?

  2. Whilst the Euro has been drifting lower, what I find surprising is the lack of faith in Sterling. Today we had a number of poor results from the Euro zone and a very minor slip in the UK manufacturing PMI and yet the pound was hammered v.v the Euro. Me thinks that if there is a protracted softening of data in the UK at some point then the pound will get hammered. Irrationally so.

    • Hi Pavlaki

      I was looking at the UK effective exchange-rate earlier in the week and that has held in pretty well. The UK Pound’s fall in the latter part of 2014 has been driven by the strong US Dollar. I know as I have just replied to JW it fell against the Euro yesterday but it is up against it by 6% over the past year.

      Intriguingly the UK Pound is nearly back at the March 2013 lows against the US Dollar (£ crisis levels or rather level) but has gained elsewhere (Euro, Yen and now Rouble…).

  3. I bought diesel at 2.09 recently (approx 84p British), and noted LPG (autogas) at 1.02 down from a high of over 1.40 – it’s going to make a big difference in this low wage economy.

    • Hi ExpatInBG

      The cheapest diesel nearby is in fact one of the supermarkets which has dropped the price of diesel to £1.169 per litre. You can get some off that if you do some shopping there but the most I have got is 4 pence off.

      So you are doing a lot better than us (overtaxed) Brits! But even here there are gains especially for heavy users like my brother who is a driving instructor.

      • I’m starting a new (software engineer) job Monday, first 2 months in Cardiff (expenses paid) thereafter based in office in Sofia. Won’t drive for work – so diesel price will be small concern.

        Economically – have seen small uptick in professional Sofia jobs. Using purchasing power, I’m probably better off here than overtaxed Britain – though it depends on what you purchase.

  4. Have no fear , Draghi is here !

    “Draghi comments send euro lower”

    Q: QE will have any impact on the real economy?

    A; I’ve seen none so far but QE is for the Banks , not the people

    Q: Should the ECB decide to step into the world of full-blown sovereign QE there are a multitude of problems that the media skips over

    A: the Germans for sure but no worries they’ll rename it ……

    Music / Genesis – A Trick Of The Tail

    There, beyond the bounds of you weak imagination
    Lie the noble towers of my city, bright and gold.

    All smoke and mirrors , Shaun, what else could they do ?


  5. oh forgot

    for the Greeks

    “The rule is, jam tomorrow and jam yesterday-but never jam today

    It must come sometime to jam today, Alice objected

    No it can’t said the Queen It’s jame every other day. Today isn’t any other day, you know”


  6. Hello, Shaun. It is appropriate that your first posting of the new year should be about the ECB, now that the euro area has expanded to 25 members with Lithuania giving up the litas for the euro as 2015 began. This seems likely to be the last new member for a few years, but Croatia is likely to join when it can. Its deficit and its debt keep it from entering ERM II, as its economy is in a bad way. Just the same, its government has no plan B, so it seems future Croatian membership in the euro area is as certain as anything can be in this uncertain world. If Croatia can get its finances in order quickly, it could join the euro area as early as 2019. The Croatian central bank has always followed an exchange rate policy since Croatian independence, targeting first the Deutschmark, then the euro. It has never tried to conduct an independent monetary policy.

  7. Happy New Year Shaun and to the entire Notayesmansecon gang!

    Great post, I think the gist being that we are back, yet again, to Newt from Aliens.

    I can’t understand why Mario is complaining about price stability. Prices don’t get much more stable than 0.1% H-CPI. How does inflation at 2% represent “stability”? Anyone would think he was bending the meaning of words or had another agenda…

    • Hi Andy and Happy New Year

      Mario wants inflation to help reduce the debt burden. The catch is that Euro area austerity has produced exactly the reverse of general disinflation and in some places deflation….

      As to language then price stability went into my financial lexicon for these times quite a while ago! Both the BoJ and the ECB are trying to make their populations poorer through inflation whilst claiming they will be better off.

  8. Have faith Shaun, I believe Germany is leading where others will follow in the next couple of months. I hope they do as I’ve already placed my money on the EZ and continue to predict an upturn come March/April.

    The real social problem to me is that the upturn could well be a jobless one.

    • Hi Noo2

      From the early stages of the credit crunch I thought that this would be what the Eagles called “The Long Run”. So measures had to survive a recovery phase but then another drop. The real issue for the Euro area is the weakness of any recovery before the next drop so i completely agree.

      As to 2015 I agree about there being some factors for an upturn such as the lower oil price and the fact that some ECB measures will eventually have some impact. I did not put in the article but will type now that this looks to me to be the wrong time to be implementing QE and if they do and things enter a recovery they will be in danger of the wrong answer, because other factors are at play.

  9. For me, the question has to be, “If our economy is doing so well, and if we’re on top of the deficit, and since we’re not held back by PIGS, how come our currency is doing so poorly?

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