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At his press conference last week, ECB President Mario Draghi threw cold water on the prospects for rate cuts in Europe any time soon. This followed the ECB decision to keep rates on hold. The rate decision was expected, but the relatively upbeat assessment of the European economy wasn’t …
Draghi said he expects the European economy to experience a “gradual recovery” starting in late 2013, basically saying that rates and monetary policy is accommodative enough. The surprise assessment of the European economy caught euro shorts by surprise; one-third of economists surveyed prior to the meeting thought they might cut rates. And it ignited a short-covering rally as people didn’t expect something so hawkish.
Interestingly, this hawkish ECB decision comes after three weeks of consistently poor economic data emanating from Europe, highlighted last week by the fact that the unemployment rate across the EU reached a new high of 11.8 percent. More troubling, Spanish unemployment sits at an astonishingly high 26.6 percent, Greek unemployment at 26 percent, 16.3 percent in Portugal, and 14.6 percent in Ireland.
Societies Can’t Exist with
26 Percent Unemployment
These numbers simply aren’t sustainable! And they underscore how essential it is to get the European economy growing again if we are going to see continued improvement in the sovereign crisis.
What’s more, the number is much higher for the youth of those countries. In Spain for example, youth unemployment is a whopping 56 percent. Unless economic growth returns and the unemployment rate begins to drop, at some point the people will revolt against austerity, either through the polls or in the streets. And they’ll elect or install people who tell the rest of Europe to go to fly a kite — which will reignite the crisis.
Unemployment in Europe hits new peak. And unless economic growth
improves, the worse may be to come.
It won’t happen today or next month. But unless those unemployment numbers start to drop, and the only way that’s happening is through economic growth, then the crisis is far from over.
I point this out to you because the ECB knows this is true. So it’s very surprising that they are so firmly on hold and unwilling to help the European economy, even with very low inflation.
So for the time being, the ECB is on hold. And that is short-term bullish for the euro. But I will reiterate that the strong euro is going to be a drag on growth. And it would be a shame if the ECB, after basically quelling the crisis last year, ignited another one by being “penny wise and pound foolish” with regards to getting the European economy growing again.
One way you could play potential weakness in the euro is via the ProShares Ultra Short Euro (EUO). This ETF is meant to rise 2 percent for every 1 percent decline in the euro.
Best,
Tom
