The euro is having a banner day today, gaining almost a full cent against the pound, and half a cent against the dollar. This is an unusually strong run for the common currency in recent weeks. Yet, of course, it has less to do with the Eurozone than reports Britain shrank –0.7% in Q2. That’s led the markets to sell the pound, and buy back the euro following recent sell-offs.
But, in spite of this, is it possible the euro could gain on its own merits on the coming days? I say this, as Governing Council member of the European Central Bank, Ewald Nowotny, ruminates giving the Eurozone rescue fund a banking license. Speaking to Bloomberg Television this afternoon, Mr. Nowotny said, “I think there are pro arguments for this.”
In practice, this would allow the ESM (European Stability Mechanism) to borrow unlimited funds from the European Central Bank, and therefore surpass its vaunted €500 billion limit. It could then loan endless sums to battered Eurozone members such as Spain and Italy, and do much to reduce market nervousness in the process. In short, it could be the big bazooka the Eurozone still sorely lacks.
Yet, if this is to happen, the idea must overcome opposition from no less than the ECB’s president Mario Draghi. Speaking recently, he said: “I don’t think there is anything to gain by asking the institution to act outside the limits of its mandate, thereby destroying its credibility.” That’s firm opposition! Furthermore, creditor nations such as Finland and Germany would also question the plan, which would involve them taking on unlimited liabilities for their Eurozone partners.
But for all that, it remains true that, if northern Europe wants the euro to endure, something more must be done to aid the Mediterranean Bloc. Giving the ESM a banking license could be the quickest (though of course, least democratic) way to do that. If Nowotny’s suggestions gains momentum, we could therefore see the euro holding its gains in the coming days.
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