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Sunday, December 14, 2014 7:32 PM

Draghi About to Quit ECB?

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Rumor has it that Draghi is so fed up with German opposition to everything he wants to do with stimulus and sovereign debt bond buying that he is about to leave the ECB.

The Fiscal Times asks Why the Hell Does Mario Draghi Want to Leave the ECB Now!?

What would happen to Europe’s prospects for recovery if Mario Draghi left his job as president of the European Central Bank? Would Draghi’s plans to implement an ambitious policy of monetary stimulus get bulldozed by German inflation hawks and others favoring continued austerity across the Continent?

Even a week ago there seemed little reason to ask such questions. Not anymore. Draghi appears set to leave Frankfurt and return to his native Italy the first chance he gets.

This could be as soon as January, depending on a variety of circumstances in Frankfurt and Rome, according to well-placed sources who include a prominent private investor and a senior journalist in Rome. “Draghi wants out, fed up and stymied by Berlin,” one of these sources wrote in a note just before the weekend. In a subsequent message: “I am hearing from several [official] sources that he is entirely fed up with the monetary politics he confronts.”

Some observers in Italy reckon that Draghi thinks he has done all he can at the ECB. But it’s some and some on this point.

“There are others here who say Italy now needs a president who can reassure Europe as to the direction of Italian reform policies,” my journalist colleague in Rome tells me. “Draghi rates high in this respect.”

Why would Draghi cash in a position of considerable international influence to take up the figurehead presidency of a mid-sized European power?

Again, no simple answers. Contrary to appearances, Draghi may have concluded recently that he won’t prevail against his austerian adversaries, some sources suggest. It is more likely that, as everyone has already concluded, he recognizes that there are no promising alternatives to succeed Giorgio Napolitano, who is expected to step down as president early next year. “Draghi’s a last resort for Italian politicians,” in the estimation of one informed source.

For his part, Draghi denies that he has any presidential ambitions—or any plans to pack up in Frankfurt, for that matter. But my sources advise that we assign these assertions zero credibility. Draghi went home in mid-November to deliver a speech on ECB policy to students at the University of Rome, and the occasion was widely taken to be a toe in the water prior to a full-dress presidential candidacy.

Another factor evident here is Prime Minister Matteo Renzi. One, sources say he appears to think he can make more use of Draghi in Frankfurt than at home. Two, there are indications he doesn’t want a figure of Draghi’s weight and international stature crowding into his picture frame.

The weakness of other candidates—Romano Prodi, a former prime minister, and Giuliano Amato, a former interior minister and now a member of the constitutional court—again comes into play. Even with the failed speech and Renzi’s probable resistance in view, a source in Rome concludes, “If Draghi opens the door it won’t be difficult to reach the needed consensus. He’ll get it if he wants it.”
Draghi's "Small" Tactical Retreat Ahead of QE

The Financial Times discusses Draghi's Tactical Retreat Ahead of QE.

The ECB made some statement changes ahead of the much ballyhooed QE program expected next year, so much so that it appears the ECB does not have any real target.

But there is a difference between a "small" tactical retreat and being so fed up that Draghi is about to leave. So which is it?

I picked up the above links from ZeroHedge Mario Draghi: Goodbye ECB, Hello Italian Presidency?

I offered my own opinion on a possible move of ECB president Mario Draghi back to Italy way back on November 13.

Next Phase: Currency Wars, Deflation, Yuan Plunge

Please consider Next Phase in Currency Wars: Yen Plunge, Yuan Devaluation, and "Tidal Wave of Westbound Deflation".
Deflation Shockwave Thesis

  1. Next phase of currency wars is underway.
  2. Abe will "do whatever it takes" to produce inflation in Japan.
  3. Abe will soon "lose control of the situation".
  4. Yen sinks to 145 to US dollar.
  5. China will respond by devaluing Yuan.
  6. "Tidal Wave of Deflation" heads West.
  7. US brands China a "currency manipulator"
  8. Global currency crisis ensues
  9. Gold soars

Points 1-6 from Albert Edwards at Society General. I added points 7-9.

It may play out this way, but if so, perhaps it takes longer than March. I will give a big tip of the hat to Edwards if it plays out that way within a couple of years (whether or not my points 7-9 happen).

My only disagreement with Edwards is on a tangential issue. The problem in the eurozone is not Mario Draghi or Germany.

Draghi cannot do "whatever it takes" to spur credit and inflation because the primary problem in the eurozone is structural, with the euro itself. A key secondary problem is productivity issues between member states. The secondary issue cannot be resolved (except at the expense of Germany and the Northern states) if every country remains on the Euro.

There is little Draghi can do to spur credit creation in Europe given the above constraints, productivity issues, bank leverage, the Maastricht Treaty, and increased infighting among member states, some of which want to violate the treaty and others not.

Draghi's Next Move - Back to Italy?

Neither Draghi, nor Germany, nor any Asian countries will be pleased by Japan's attempt to boost exports by driving down the Yen. This will make it all the more frustrating for Draghi. Calls will mount for Draghi to "do something".

I suggest Draghi might just quit, then head back to Italy, perhaps as next president, perhaps to run for prime minister. If Draghi is smart, he will get out of the way before crisis hits rather than during the next crisis.

Currency Crisis Coming Up

When China reacts (and China will react if the Yen hits 145 to the dollar, perhaps before that point), the US will scream and the protectionists in Congress will call on Obama to label China a "currency manipulator".

Political necessity ensures the largest screams will not be about Japan, but about China, when China reacts to pressure from Japan.

Labeling China a currency manipulator would of course make matters much worse, but that is precisely what I expect from Congress should China devalue. Global trade would then collapse amidst competitive currency debasement. Finally, under such a scenario, gold would likely soar.
Albert Edwards pinged me with a comment agreeing with points 7-9 regarding currency manipulation, a global currency crisis, and gold.

Everyone is guessing of course. But Keynesians, led by Paul Krugman are all screaming for still more stimulus even though it clearly wrecked Japan.

Mike "Mish" Shedlock

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