“Don’t hold Euro!” – Inflation, Export & ECB – €uro Policy Analysis

Europe no longer seems to want a strong euro – Europeans have always had a soft spot for a strong (national) currency. It was proof of a smooth-running economy as well as price and financial stability. Today, the euro no longer has much in common with the former national currencies. The pure stability rules are being watered down more and more and economic strength is dwindling. That is why the common currency presents itself so weak against the dollar. But this hardly seems to concern the (monetary) policymakers in Europe.

Back then, there were still good reasons for currency strength
Officially, the ECB inherited the stability mandate from the previous European national central banks. Unofficially, however, it does not seem to take it very seriously. When ECB chief economist Philip Lane says “the current inflationary phase is very unusual, temporary and not a sign of a chronic situation,” it is clear that price stability is no longer very important.

In the past, he would have been heavily criticized for such a statement. In the past, price increases would not have been beaten around the bush. They would have been tackled immediately at the root with key interest rate hikes and rising bond yields. Today, however, the ECB remains silent, weak, appeasing, inactive. But sinking real interest rates will certainly not strengthen the euro – rather the opposite.

Alongside price stability, financial stability no longer enjoys preferential treatment as well. The covid crisis event was misused as a lever to finally turn the stability union into a debt union.

The communitization of debts and monetary gifts should only happen once. But we know the meaning of “only once” in Europe: once becomes several times and then regularly.

In fact, even the newest elected European governments are also demanding the continuation of debt socialism and even the Europeanization of social security systems. This mutual insurance is intended to prevent further withdrawals from the EU or even the eurozone from ever occurring. Then – so they fear in Brussels – the European community could face an exodus.

To balance the economy, the debt party must then be extended further and further. The deteriorating creditworthiness of the euro area as a whole is not an argument for currency strength.

A weak currency, in turn, increases the inflationary pressure on imports even more for Europe, a region poor in natural resources – as can be seen at the moment. The euro will therefore become even less attractive as a result of even lower real yields. In principle, this is not the way to attract foreign investors to finance European budget deficits.

So, since the euro is competing with other currencies, there are, after all, good reasons to promote it with price stability, the strength of credit rating, and business-friendly policies. It used to be said that the currency is a country’s stock price. But if Europe comes across as a stability amateur, it should not be surprised if its currency is also treated like an amateur.

In fact, the trend on the currency futures markets continues to be for the weakness of the euro against the U.S. dollar.
Against the Swiss Franc (and its stability), there’s an even more clearer bearish picture:

EUR/CHF is about to make a new 6-year-low and presumably breakdown the 1.0 level in 2022
(Weekly Chart, can be seen as a kind of Euro Index)

The European Central Bank…
However, the image of incompetence and amateurism seems to have little effect on the ladies and gentlemen of (money) policy.

Why should it? In fact, thanks to a patronizing, Saint Martin-like ECB, Europe no longer needs the lure of attractive interest rates for foreign investors. Everything stays in the “family”.

Because of this modern monetary theory, by the way, no investor will dare to bring Europe out of financial dormancy. “Don’t fight the Fed” was the old saying. Today, the same applies to the ECB. It slaps the wrist of any malicious speculator who dares to sell massive amounts of European government bonds by buying them itself. This prevents sharply rising interest rates in struggling euro countries, which would make their debt servicing more difficult, if not impossible. Due to credit rating losses, reform renitence, and economic weakness, they would be justified, but undesirable from a regulatory point of view.

And when interest rates are below inflation in this way, it works as successfully as a super-weapon in the fight against national debt. The debts, of which Europe has more than enough, are going to “inflationized” away. Any shrinkage is welcome.

The Export Argument
In general, a strong currency is an extreme hindrance to exports. This applies all the more to Europe as an export region, not to mention Germany. If the domestic economy is lacking movement due to various structural deficits, buoyant foreign trade is supposed to ensure economic mobility. When it comes to appeasing the euro, the ECB is happy to play the role of the lion tamer.

Even if the ECB ends the pandemic emergency purchase program in spring 2022 as planned, it already has its sights set on increasing the conventional one. As an unofficial “export promotion bank,” it will continue to prevent excessively high interest rates from giving the common currency an upper hand.

Europeans who simply try to save some money on their savings accounts and otherwise do not hold any inflation-hedging financial assets (the majority) are ACTIVELY LOSING the value of their savings FOR YEARS and there will only be more loss of value in the future. EU Politicians (the ones that put their 5-digit monthly salaries into all kinds of assets) actively work against these savers to expropriate them indirectly through inflation. And I am sure that many people do not even know about this.
“Brave” new currency world: A weak euro is a good euro for the (monetary) politicians.

By the way, the U.S., China, and Japan are no innocent children of currency dumping either.

DepthTrade Warning:
Do not hold long- or mid-term buy-positions on the euro currency!
Do not hold big amounts of euro on bank accounts or cash!

Ben Schaack Send an email

Mr. Schaack is a financial analyst, specializing in the commodity, foreign exchange, and crypto markets - with more than 10 years of experience. Besides his business analytics studies, Mr. Schaack works as a journalist - covering finance, economy, and geopolitics. His special interests are focused on inflation hedging and exponential (compound interest) growth. He posts and discusses relevant news on his Twitter account.
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