ECB Decision No Surprise to Market

By Barbara Zigah
The European Central Bank met earlier today to discuss what steps they will need to take to prevent a Eurozone economic meltdown, with Portugal and Spain perhaps the next to fall.  The decision to leave interest rates unchanged was expected.  At a press conference in Frankfurt, the ECB President, Jean-Claude Trichet commented that the stance of the current monetary policy remains accommodative, and will be adjusted as deemed appropriate, given that the non-standard measures are temporary in nature, by construction.   He reiterated that the Council would continue to monitor the Eurozone situation very closely.

The majority of analysts cautioned, however, that the ECB’s options were somewhat limited, and they expect markets to be largely disappointed.  What markets would like to have seen is the implementation of a quantitative easing scheme, specifically a massive bond buying program, similar to the recently implemented QE set in motion last month by the U.S. Federal Reserve Bank.  Unfortunately, the consensus was that it wouldn’t happen, and even if it did, it wouldn’t be in the scale desired or required, according to some economists, who say the Eurozone might need as much as €1 trillion.

What worries many is that the ECB would simply continue the existing LTRO (long term refinancing operation) approach, considered by many to be wholly inadequate to stem the contagion.  Certainly, the repercussion of maintaining the status quo will in the long run wreak havoc on the common currency, today EUR/USD trading at $1.3140.  Last month alone, the Euro declined nearly 7% last month against the U.S. Dollar, but likewise weakened against other majors.

Not that a weakened Euro is a bad thing, as theoretically it makes European goods all the more attractive and exports should rise accordingly.  Third quarter exports rose 1.9% in the Eurozone, lower than the 4.3% increase in the 2^nd quarter, but the Euro had gained strength early in the 3^rd quarter and only started weakening at the half-way point.

Of course, there was the little matter of the recent “pledge” among the G20 participants that no country would intentionally intervene in their country’s currency and rekindle the currency wars.  Certainly, taking advantage of a decline in the Euro as a by-product of ECB policy shouldn’t be considered a violation of that pledge.  The fact is the ECB needs to do what it needs to do to encourage growth and ensure the survival of the Eurozone… one way or another.

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