Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

European Sovereignty retrieved!

|Includes: SPY, iShares 20+ Year Treasury Bond ETF (TLT)
Sovereignty retrieved!
 
By sovereignty, I mean that of eurozone leaders who have brusquely seized it back in recent days, by putting a stop to the ECB's permanent "coup d'état" following the euro's creation.
 
The way in which the ECB, initially under the governorship of Wim Duisenberg (I am Mr Euro!”) and then Mr Trichet (Je suis Monsieur Euro”) seized responsibility for eurozone currency policy, in contraction to all constitutional treaties, was the subject of repeated criticism in these lines, because this allowed one of the main economic policy responsibilities of European countries to fall into the hands of unelected officials (who happened to be hardcore supporters of monetarism).
 
 
I present, below, the proof of this sham (thanks to a little investigative digging), with excerpts from Article 111 of the treaty instituting the European Commission:
 
  1. By way of derogation from Article 300, the Council may, acting unanimously on a recommendation from the ECB or from the Commission, and after consulting the ECB in an endeavour to reach a consensus consistent with the objective of price stability, after consulting the European Parliament,...  conclude formal agreements on an exchange-rate system for the ecu in relation to non-Community currencies.
 
The Council. may, acting by a qualified majority on a recommendation from the ECB or from the Commission, and after consulting the ECB in an endeavour to reach a consensus consistent with the objective of price stability, adopt, adjust or abandon the central rates of the ecu within the exchange-rate system
 
2.  ..., the Council, acting by a qualified majority. either on a recommendation from the Commission and after consulting the ECB or on a recommendation from the ECB, may formulate general orientations for exchange-rate policy in relation to these currencies
 
 
 
As such, the responsibility for exchange-rate policy on the eurozone belongs to the ECOFIN Council, consisting of finance ministers, which can thus give general exchange-rate policy orientation to the ECB, which must then carry it out.
 
There is not even a need for unanimous decision, since a qualified majority is sufficient (73.90% of votes), which means that the bloc of German votes can be circumvented (in theory)!
If the European Commission hands down a recommendation, the ECB can only oppose it if it can prove that such an exchange-rate policy would undermine its price stability goal.
 
Given the current deflationary/depressive situation, with M3 money supply and the economy down, the euro's over-valuation against the dollar in terms of Purchasing Power Parity, I do not see how it could object.
 
In my opinion, it was more the fear of officially losing its control of exchange-rate policy than the insistence of Nicholas Sarkozy that explains the ECB's about-face on the government bond purchases.
 
European leaders decided that it would be best to avoid publicly humiliating the ECB, especially since it ventured onto the path of Quantitative Easing, with the silliness about asset sterilisation hardly masking  the fact that it will have to go much farther along this path than it is today willing to admit.
 
 
Be that as it may, we were treated to a slew of statements from eurozone government leaders, all going in the same direction, i.e. the need to let the euro depreciate against the dollar, which is something they would have never dared say just a few weeks ago:
 
VAN ROMPUY SAYS HAVE TO SEE EURO FALL IN BROADER CONTEXT     
- BELGIUM'S REYNDERS SAYS EURO DROP `NOT WORRYING'             
PAUL DE GRAUWE, BARROSO ADVISER, SAYS EURO HAS SOME WAY TO FALL, SAYS DECLINE IN EURO VALUE `GREAT NEWS'          
PRODI: “EURO FALL WILL HELP EUROPEAN GROWTH.”             
Wellink : “it is best to look beyond short-term "immediate" market reactions.”                                             
- Jean-Claude Juncker, President of Eurogroup, declared that he is "not worried about the euro's current exchange rate".                                                      
ZEW EXPERT: Euro expected to decline further over next 6 months.
NERB (NYSE:IFO): LOWER EURO HELPS EXPORTERS, AS EXPORT EXPECTATIONS SHOW
 
The response from Iron-man Trichet was both swift and unsurprising:
 
Trichet: "The euro is a credible currency whose inflation rate has been below 2% for more than eleven years. The euro is not in danger."                                             
STARK: DOMESTIC PURCHASING POWER OF EURO UNTOUCHED, DO NOT HAVE A WEAK EURO.                           
 
And the contradiction in terms came from none other than the European Commission President himself:
BARROSO SAYS NEVER COMMENTS ON EURO, ECB DOES MONETARY POLICY
 
But the euro's situation is also worrying certain people who have never shied away from using the currency weapon:
-CHINA NDRC OFFL: EURO, NOT YUAN, DISCUSSED IN MORNING WITH US  
 
 
 
Conclusion:
 
The retrieval sovereignty by European leaders with respect to exchange-rate policy and the euro is good news for the eurozone, because it allows us to escape from the still predominant Malthusian policy of certain ECB officials, who have decreed that the stronger the currency, the stronger will be the economy, which is surely true when it comes to price stability, but is certainly not when it comes to economic growth, unemployment, etc. (and the ability of governments to pay their national debt).
 
There are many indirect benefits to the weakening of the euro (which I emphasise, remains undervalued).
It may enable us the European economy to escape from the growing deflation/depression spiral. A weaker euro would certainly aid countries dependent on tourism and would increase the attractiveness of real estate in the eurozone, which would be a big relief to some very hard-pressed banks, as exemplified by the latest example with the Spanish savings banks.
 
 
The best illustration that a policy of competitive devaluation, at a time when the eurozone has come under fire, does not lead to hyperinflation (like those who image the pressing printing money seem intent on believing) comes from the Swiss National Bank, one of the world's most reputable central banks, which continues to intervene on currency markets by selling its own currency!
Mr Hildebrand, the courageous 46-year-old chief of the SNB has been working for months against the appreciation of the Swiss Franc against the euro, which is fuelling what he clearly identified as deflationist entropy.
 
As such, the reserves of foreign currencies have accumulated to the point that they now represent 68% of the SNB's balance sheet, but remember that the quantity of its own currency a central bank can sell is unlimited!
I would not be surprised if its estimated currency interventions soon rise to over €100bn!
In this respect, it is well worth considering the latest comments by Mr Hildebrand :
- The Swiss National Bank's actions are driven by its mandate to secure price stability in the Alpine country.
- The central bank's goal is symmetric, including the fight against inflation as well as deflation.
- We are prepared to fulfill our mandate" and "will take all necessary measures" in order to ensure sustained price stability.
 
 


Disclosure: Long 20 years OAT and 30 years BTP Zero Coupons, EDF Corp 5 Years 4.5%, Grece 2 Y and 10 Y bonds