The Real Euro Watch

Everyone is now a euro watcher. The European common currency’s exchange value against the dollar has been on the rise, to put it mildly. Despite decades of declaring floating currencies the optimal framework, it really is quite entertaining to watch the furor when these things actually float one way or the other.

This recent trend has been attributed to the ECB and its head Mario Draghi. Not that in the mainstream there is belief Europe’s central bank and its central bankers want the euro moving up, rather conventional opinion opines that because the ECB has been effective with its “stimulus” the European economy is now in a very good place.

“Draghi could have been more forceful on the euro,” said Marco Valli, an economist at Unicredit in Milan. “But the Governing Council seems to think that at least part of the appreciation is a consequence of the economy’s strength. Therefore, sounding too concerned would have not been credible.”

It’s a bit more basic than that. After having said nothing but good things about Europe’s economy and the performance of its central bank for ten years as it all fell apart, economists aren’t going to now say something different. There really is great dissonance about why central banks from the US to Canada to Europe are thinking of none but the exit. The problem lies in what really is a common policy window, not several individual ones.

For the first part, there isn’t any trace of “stimulus” on that side of the Atlantic. If convention is right, we should be able to detect the effects of QE and the other LSAP (large scale asset purchases) programs. We can’t.

Starting with inflation, the ECB’s staff of economists and their models still forecast just 1.5% HICP growth in 2017. That’s down from 1.8% projected in March 2015 at the start of the PSPP part (QE). In addition, projections for next year continue trending down already being lower than this year.