Deja Vu All Over Again

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 |  Includes: FXE
by: Cullen Roche

Another day another Euro crisis. I am just waiting for the headline where someone declares big changes in Europe that lead to a “fix”. In the last few weeks the driver of positive news has been the changes in leadership. Unfortunately, we’re just swapping out one monetary ignoramus with another.

Yields in Italy are now officially over the breaking point of 7%. This crisis has played out almost exactly as I figured it would. Now, it’s go time for the EMU leaders. Italy’s situation is officially unsustainable and the bond markets have forced these leaders into a corner where they must fight their way out. So, what can they do?

The latest and greatest rumor is increased ECB intervention. The rumor I have been hearing is a QE program of some sort. Okay, but let’s be very clear about this. If the ECB announces a large QE program it must not only be large – it must be unlimited. That is, they must set the Italian bond yield via an explicit target rate and not a size. Would the Germans be okay with that? I doubt it. The term debt monetization would be splashed across the front of every German newspaper. Instead, my guess is that, if they go this route, they’ll do something like QE2 and name a size and not a price. It won’t work. It might jam Italian bond yields lower like the August announcement did, but it won’t stop yields from rallying again. Besides, if they implement open ended QE they’d likely have to do it for Portugal and Spain as well. I just can’t imagine them unleashing the bazooka that is necessary here. Americans still don’t even understand QE and we’ve been through it all and seen what a massive failure it can be. Nonetheless, 95% of financial professionals still refer to it as “money printing”. Unbelievable, yes.

Europe needs to move forwards towards sovereignty. An unlimited QE program would be shocking in my opinion. And a limited QE program won’t set the rate. I still think a Euro bond and a move towards a true fiscal union is the real fix here. I know no one wants to admit it, as if fiscal unions are so awful (worked out pretty well for us Americans), but it’s the only true fix here. That or blow the whole thing up. It looks like an easy choice to me.