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Recent developments in Greece, France, Italy and Germany all point at further fudges of various kinds as a way to prolong life of the Euro zone, rather than addressing the root of the problem (the widening divergence between the North and the South). Mario Draghi remains the de facto undisputed ruler in the Euro zone and this will become more glaringly obvious if Merkel loses in the next elections to Schultz, as polls are now predicting.

Anyway, he does not even bother to wait for changes at the top of the main European countries to take far-reaching decisions on his own. He keeps on forging ahead. The minutes of the latest ECB meeting revealed that Mario Draghi is getting ready to ditch the “capital key” (the automatic link between quantitative easing and the relative size of the 19 euro-area economies). It may not come as a full surprise. Indeed, we had in the past suggested that this would be inevitable as the ECB was running out of bonds to buy in some countries, especially Germany. However, if implemented, it would be a massive change as it would turn the Euro zone into a de facto transfer union (which is again the letter and the spirit of the European union treaties).

A central bank’s job is not to engage in politics but to adapt its monetary policy to a changing economic environment. However, Mario Draghi behaves as if his mandate is to save the Euro project, especially after governments in Europe having renounced working on making this monetary union sustainable in the future dropped the baby on his sole lap. Politics rather than economics dominate the thought process at the ECB and this may have seriously damaging consequences as economic conditions are currently changing.

Activity is picking up almost everywhere on the globe and, surprise surprise, inflation is back (the 2% threshold has now been crossed in Europe). Even Janet Yellen has noticed! She has prepped up the market for a rate hike in March. Yes March, not December! For how long can the ECB ignore the economy? Greenspan was rightly blamed for the financial bubble which blew up in 2008. Will Draghi be blamed for the next one?

Lionel Rayon

Lionel joined Schroders as part of the acquisition of Cazenove Capital in the summer of 2013, having been at Cazenove since 2005. He is a senior member of the pan-European equity team and manager of the Schroder ISF* European Alpha Absolute Return (circa $1 Billion AuM). He is also responsible for developing and maintaining a fundamental and valuation screen of European stocks. The screen forms the basis for generating ideas for potential further detailed investigation by the European team within the framework of their disciplined Business Cycle Approach. Lionel joined from Citigroup where he was a Director in the European Tech Research Team. Prior to Citigroup, Lionel had been with Schroders Securities, as a French specialist, Nomura Research Institute, as a metals & mining specialist, Enskilda and Chevreux de Virieu. Lionel graduated from Indiana University (MBA) and Institut d'Etudes Politiques de Paris (BSc economics & finance). He has 20 years of equity research experience.

Website: www.schroders.com

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