Executive Summary: Today marks the third major blunder by the ECB since 2008. In July of that year, two months before Lehman Brothers failed, the Trichet-led ECB tightened because it thought inflation was the dominant threat in the eurozone. It did not learn from this blunder. Three years later, the ECB raised rates twice in 2011—despite the fact that Europe was in the throes of the most significant debt crisis in modern times and the pace of monetary expansion was subdued.
Now, after throwing markets into a lather last week over the prospects of open-ended monetary easing, the ECB followed this unveiled threat with—drumroll, please—no immediate action. Markets understandably were sent reeling on the news. In fact, this could credibly be called the fourth ECB blunder, as ECB President Mario Draghi made a mistake when the second LTRO was launched earlier this year by bending over backwards to warn markets that it would likely be the last and was “necessarily temporary and limited” in scope.
Thus, it is clear to us at this point that the ECB is neither willing nor disposed to follow words with adequate deeds (i.e., to do enough to create an adequate monetary expansion in the eurozone). And that means progress on structural reform will difficult, if not impossible.
Austerity will prove fruitless, if not self-defeating, if bond yields continue to tower over actual and expected nominal GDP growth. Peripheral countries will likely remain in near-depressionary states for years to come. The core of Europe, led by Germany, will eventually recover, but likely not robustly enough to pull the periphery out of the current slump. Europe seems destined for its second Lost Decade. Portfolios should be structured accordingly....MUCH MORE (7 page PDF)
HT: Macro and Other Musings:
The Epic Failure of Central Banking
