He’s Done it Again


Building a Smarter German-American Partnership

He’s done it again. Mario Draghi, the head of the European Central Bank, has worked his magic and achieved exactly what he set out to do. This time, he talked down the euro.

Draghi barely mentioned the currency in his prepared remarks in the press conference after the regular meeting of the governing council, merely pointing out that the central bank is monitoring the situation on foreign exchange markets. “We want to see if the appreciation is sustained, and if it alters our assessment of the risk to price stability,” he said. Those words proved to be sufficient to send the euro two cents down versus the dollar. Within minutes of the end of his press conference, the common currency started declining versus all but two of its major counterparts. Draghi had achieved what many politicians in the periphery of Europe would like him to do: weaken the euro.

However, as has been the case with the launch of his bond buying program known as OMT (Outright Monetary Transactions), Draghi had done so without firing one single shot. How did he  do it? And what exactly happened today?

Draghi still has a credibility surplus that allows him to move markets without actually doing anything. On Thursday Feb. 7th, he once again successfully managed expectations. Markets still very much believe that he is prepared to do whatever it takes to save the euro. They are reluctant to test whether he can actually trigger the huge weapons he has brought on deck.

He walked a very fine line between France (whose President Francois Hollande thinks that the euro should be weakened by intervening on currency markets) and Germany (whose leadership believes nothing should be done, not yet at least). He continues to be a master in monetary diplomacy.

He did not specifically talk about countermeasures he would take should the impression arise that a G20 country had started to manipulate its currency in order to gain a competitive advantage. However, by mentioning the ECB’s inflation target (2%), he hinted at further easing should the euro zone slip into deflationary territory. Draghi did not say however, whether the governing council would merely lower interest rates or even consider following others (FED, Bank of Japan or Bank of England) on their path of quantitative easing.

My guess is that he would like to do none of the above, hoping that words can mitigate the effects of measures undertaken by others (in particular Japan) that are weakening, and will probably continue to weaken, their currencies. So far the euro is still moving within its historic band of fluctuation. But for how long? Draghi today merely acknowledged that the so-called currency war has appeared on his radar screen. But what he intends to do about it if things really heat up is far from clear.