In something of a contrarian view of the results of last Thursday’s meeting of the European Central Bank, Merk Funds President Axel Merk said ECB President Mario Draghi took tail risks out of the eurozone, while at the same time forcing closer fiscal integration, actions that Merk calls “pure genius.”
“Investors have not woken up to it, but last week may have been a game changer,” Merk (left) writes in his latest commentary. “He did it all while keeping the ECB out of some political minefields. It's pure genius. The initial market reaction suggested he might have lost a battle, not realizing that he is winning the war.”
In essence, Merk adds, Draghi told the world that the ECB will act like a central bank of a United States of Europe if the integration of European fiscal policy accelerates.
“Draghi also correctly shifts the focus going forward on the increased 'fragmentation' in the eurozone where market participants increasingly focus on domestic rather than intra-European activities,” he wrote.
The ECB’s decision to do little to help stimulate Europe’s ailing economy was criticized by many professional money managers. They read Draghi’s recent comments on the eurozone as a sign the ECB would step in, and were disappointed in what they say were “overpromises” by the central bank’s president.
“It is less powerful than we had hoped for,” PIMCO’s Bill Gross said Friday in reaction to the ECB’s decision. “To this point, the ECB and other policymakers have been all about promises and inviting others to take the first step, and it appears that we are seeing much of the same thing this morning.”
“This is a game of promises, a kick-the-can type of moment and yes, we're disappointed,” Gross added.
But Merk remains undaunted in his assessment.
“For now, with the prospect of ECB action–even if with delays and no guarantee–a number of tail risks have been taken out of the eurozone,” he concludes in his piece. “In our assessment, that alone warrants a significantly stronger euro versus the U.S. dollar. As we discussed, we believe there’s a new wind blowing in the eurozone. That wind may well take the tailwind of recent months out of the U.S. dollar.”