Morning Brief – Emperor’s new clothes

Tue 14 Dec 2021

Emperor’s new clothes


In the Euro area, inflation is running close to 5%. With the spread of Covid and it’s many variants of concern, largely dominated by Omicron at present, visible in close neighbours including the UK and Denmark, the EA is braced for comparable health concerns to hit its borders. The ECB is sitting on a balance sheet equal to 81% of its GDP, with much of that dedicated to a virus it is relatively impotent to control. Unlike many other major central banks it also has to wear the reputation of failing to support the Eurozone economy in 2011 following the financial crisis and during the European debt crisis. So we can likely all agree that anyone would want to steer well clear of running the ECB right now. Unfortunately for Christine Lagarde, that mandate lies upon her.


We sit within a perilous moment for Euro monetary stability so you might expect some high level central banking would be going on at the public level and behind the scenes. Well at the public level that certainly hasn’t happened. In fact one week ago the President announced that Euro bank notes will be redesigned. Surely not a phrase widely acknowledged: isn’t that a bit like painting the house whilst it’s on fire? The Danes, wrote the book the Emperor’s new clothes and remain a member of the EU. If only they had been a member of Eurozone they might have been privy to such a decision and admonish the President! Hopefully the new Euro notes won’t be invisible like the fabled Emperor’s clothing.


Let’s hope for more substance from this week’s ECB decision then. The market seems to have adopted the consensus that the ECB will commit to removing net purchases from the PEPP (the covid-QE program) by March. This will still leave the ECB with monetary instruments set at record lows with trillions of Euros worth of balance sheet. It is unlikely that we will get any clues about how the ECB will normalise these instruments this week. However, if inflation doesn’t fall back in line with its 2% target quickly, the market’s patience for the Euro will run thin.




Discussion and Analysis by Charles Porter

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