The Draghi Grand Plan 2.0

The parents fight and the kids hear everything. The younger, more naive ones, think that the parents are on the verge of a divorce, but nothing could be further from the truth. That`s the picture of Europe today. The outsiders are the young kids listening to the fights between European leaders.

Grand Plan 1.0
Recently, Mario Draghi outlined Version 2.0 of his Grand Plan for Europe. I have written about the first version before (see Mario Draghi reveals the Grand Plan and Draghi`s "growth pact" = Internal devaluation ). To recap, Grand Plan 1.0 involves:

• The ECB taking steps to temporarily hold things together and buy time so that member eurozone governments enact reforms.
• The reforms include:

1. Good austerity: Budget reduction through lower taxes and less government
2. Structural labor market reforms to encourage labor flexibility and breaking the social compact of lifetime employment for entrenched older workers.

In a currency union, the peripheral countries cannot devalue their currency to become more competitive. They have to enact painful reforms that amount to internal devaluation. In effect, German wages go up and PIIGS wages go down. Despite the pain, those initiatives have largely pushed the eurozone in the right direction. As the chart from link if the video doesn`t work):

In his speech, Draghi outlined the third leg of Grand Plan. In addition to the components of Grand Plan 1.0, Grand Plan 2.0 includes infrastructure spending for member states that have the fiscal flexibility to do so. In practical terms, it's an infrastructure fiscal spending for structural reforms bargain within the eurozone.

"Infrastructure spending", them`s fighting words as they are evocative of the Keynesian solution of government make-work fiscal stimulus. The criticism of Jeremy Warner of José Manuel Barroso  wrote that unity is the "is a condition sine qua non of the EU’s economic prosperity and political relevance" and it is a quality that embedded in the DNA of every member of the European elite. Everyone understands those core values.

Watch for the endpoint. The Draghi Grand Plan 2.0 will implemented in some fashion.

Disclaimer: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Written By: Cam Hui