A month ago, the European Central Bank met. The feeling was that the ECB would cut its policy rates, but would not engage in a round of quantitative easy emulating the Federal Reserve System of the United States.
The European Central Bank did as expected, lowering one of its policy rates into negative territory.
Many people have been hoping that the ECB would become more aggressive in its monetary actions in order to lower the value of the euro, which would help drive up exports and help retard the decline in the rate at which prices are increasing and possibly avoid the current dis-inflation going into actual deflation.
I wrote about this situation earlier and the hopes that many had that the value of the euro would fall below $1.3600 because of the ECB's actions.
There are a lot of investors that would like to see the value of the euro fall to $1.20 to $1.25, a value that was last reached a little more than two years ago, when I was actually in Italy.
For the most part, however, the value of the euro has remained above $1.3600 since that early June meeting, and almost reached $1.3700 one day in the latter part of June.
Still, the European Central Bank does not seem to want to go further along the road to additional monetary stimulation. They have pretty well signaled that there will be no quantitative easing on their part.
One reason for the seeming lack of desire to go further down the road to quantitative easing is the outright doubt many in Europe have that the efforts on the part of the Federal Reserve System to flood the financial markets with liquidity have had very little impact on the economy.
And while having very little effect on the economy, there is the perception that the Fed's quantitative easing may have created credit bubbles in many sectors of the economy. The important thing to realize here is that the Fed's quantitative easing has not created much of an inflationary environment for the production of goods and services. The credit inflation has primarily impacted the price of assets, the US stock market being one of the main beneficiaries.
This environment was prominently presented on the front page of The New York Times on July 7, "From Stocks to Farmland, All's Booming, or Bubbling." And it seems as most economists, from those at the Federal Reserve, to those in the federal government, to those in the banking system are lowering their expectations for economic growth in the United States over the next year or two.
Quantitative easing does not appear to have worked. And the Europeans are very aware of this.
In fact, if investors in the foreign exchange markets are telling us anything, they are saying that the European Central Bank will not overcome the monetary stimulus of the United States, regardless of what it does. That is, the predominant credit inflator will continue to be the United States, and not Europe.
European officials are wondering why they should get into the quantitative easing game when there seems to be little or nothing to gain in the way of faster economic growth… and where all the consequences of the quantitative easing seems to be in the area of inflating asset prices.
So, maybe the tack of European officials is changing. French Finance Minister, Michel Sapin wants the United States government to make the value of the euro drop relative to the US dollar, making it easier for the eurozone to get out of its economic malaise. He would also like some major trading countries, like China, to start using euros for international trade, rather than US dollars. In the near term, of course, neither of these things is going to happen.
Even though the officials at the Federal Reserve continue to taper its purchase of securities, it still maintains the most expansive monetary stance of any central bank in the world. And given all the money that the Fed has pumped into the economy over the past five years, it is hard to conceive that the value of the US dollar will really begin to strengthen in the near term. Thus, the value of the euro will continue to be a stronger currency than the US dollar, and it is highly unlikely, I believe, that we will see a euro valued around $1.2000 anytime soon.
This, of course, leaves only one basic course for the Europeans to follow. The Europeans must reform their economies, reduce the corruption in their governments and enter the 21st century. The problem is that you don't see much happening in this direction at the present time. In fact, the new Italian Prime Minister, Matteo Renzie, does not seem to be living up to the hopes some of us had placed in him.
In terms of the European politics that drive economic policy, Angela Merkel and the Germans will continue to be the dominant force, with most of the rest trailing along, unhappy in a major way. France is revealing no signs of leadership at all, with Mr. Hollande appearing to be weaker and weaker as his term moves along, and with opposition leader Sarkozy experiencing very serious legal problems connected with corruption accusations. Mr. Renzi and Italy seem to be falling into the patterns of previous leaders, and this really leaves no one to help the rest of Europe to shape up.
Thus, relative to the US dollar, I believe that the value of the euro will stay strong. I don't see the United States or Europe changing their behavior.
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