With negotiations on Greece’s troublesome debt problems still ongoing, remarks penned by European Central Bank President Mario Draghi last week seem to indicate that the institution is preparing for a potential exit of one of the currency union’s members. Despite years of telling both the region and world he was prepared to do “whatever it takes†to keep the monetary union intact, the latest letter addressed to two representatives of the European Parliament confirms that a way out of the Euro exists.
Although the message itself was not widely covered by the mainstream financial news media, the written remarks highlight that policymakers are preparing for what may potentially be inevitable. Alongside news that Greece is entering the next phase of negotiations regarding a further rescue, could Draghi’s comments be potentially paving the way for an upcoming exit? The IMF and Germany in particular, remain at odds regarding the shape and form of any further aid, with the International Monetary Fund calling for haircuts and debt relief.
Draghi Planning to Pivot
Last week’s decision by the European Central Bank came as no surprise to financial markets, with the institution keeping the benchmark interest rate at 0.00% while leaving the deposit rate at -0.40% and maintaining easing of €80 billion ahead of planned tapering. However, the real shocker did not come from the press conference in which Draghi stressed the ability of the Governing Council to adjust policy in either direction based on conditions, but rather a letter to two Italian members of the European Parliament. After years of suggesting that the Central Bank would do anything to maintain the integrity of the currency bloc, Draghi’s comments suggest that there is a way for a country to exit from the EMU.
Although he did not reference any one country by name, Draghi’s letter indicates that theoretically, any member state could exit from its Euro Area obligations should it clear its Target 2 balance. Target 2 is a payments mechanism designed to track the balance of payments within the Euro Area. In the event that a country owes money to other members in the EMU, it must first clear these debts and balances and thereafter would be free to exit. The countries that stand out as potential benefactors of this would potentially be Italy, Spain or Greece, which are in the deficit column, meaning they owe other members whereas Germany stands out as a net creditor to the tune of €754.1 billion.
