Draghi, Merkel & Hollande... vs. Deutsche Bundesbank?
Last Thursday the 26th, ECB President Mario Draghi assured concerned Europeans that all necessary measures would be followed to buoy and protect the Euro. In his own already-famous words:
"Within our mandate, the ECB is ready to do whatever it takes to preserve the Euro, and believe me: it will be enough..."
Unsurprisingly, German Chancellor Angela Merkel and French President François Hollande immediately threw their weight behind Draghi's pledge. In effect, they endorsed the ability of the ECB to use the printing press to create money with which to buy the bonds of beleaguered nations. Also as expected, German Finance Minister Wolfgang Schäuble signaled his support.
However, Jens Weidmann, head of the German federal bank, Deutsche Bundesbank, is not necessarily so enthusiastic. The key event for endorsing massive money-printing in Europe will be a meeting this week between Draghi and Weidmann. They will discuss the possibility of the ECB buying government bonds in concert with the Eurozone's bailout fund. In the past, Deutsche Bundesbank has opposed these types of measures, fearing both money printing and the proposed bailouts of its European partner banks. Perhaps the nation's fear comes with good reason, as memories of the destructive Weimar inflation in the 1920s is still deeply etched in German consciousness.
Nevertheless, the bottom line is this: if Weidmann does nothing, Europe's problems grow, and the collapse of the Euro community becomes a probability. If he agrees to actions now, Quantitative Easing (QE) -- in the form of money-printing -- will ensue. Along with it will come the rapid rise of stocks and gold.
In our opinion, Germany (as represented by Bundesbank) will eventually cave in. This caving may be indirect; perhaps Europe will structure a vote which Germany cannot possibly win. We remind our readers: do not underestimate the political capital of German and French leaders who, among other leaders, have built the Euro and will fight to keep it intact. The ECB mandate currently does not allow more bond-buying without certain approvals. This mandate can be changed, and we believe that it will be. In fact, we foresee a likelihood of multiple changes in the mandate before European QE is over which will allow the ECB and other institutions to buy many types of bonds, to buy common stocks, and to make direct investments in banks and companies within Europe.
Why would Europe stretch the mandate of the ECB so radically?
Well, let's consider the alternative: a depression and/or a deflation. Neither is a favorite of the average politician, whose focus is twofold: delaying blame on himself or herself, and getting reelected. Depression would both increase blame and assure electoral defeat. We recommend, dear readers, not underestimating the tactics and strategies that will be implemented. As the old saying goes, "All is Fair in Love and War" -- and the war to keep the Euro intact is no exception. This war will be one of verbal commentary as well as monetary and fiscal manipulation -- including much more QE from many sources.
Source: Guild Investment
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