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“A Lot of Upside” for the Euro, Merk Says: Why the ECB Beats the Fed

Aaron Task
Editor in Chief
Daily Ticker

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European stocks ended last week on a high note amid expectations Spain will soon ask for a bailout. The Financial Times reported Spanish Economy Minister Luis de Guindos is in talks with the European Commission and will ask for bailout funds on Thursday.

"If it goes according to plan, the announcement would be a plus for global stock markets, the euro, and peripheral sovereign bond prices," write IHS Global Insight economists Nigel Gault and Paul Edelstein.

Some of the enthusiasm waned Monday after German Chancellor Angela Merkel rejected her French counterpart's plan to introduce a banking union for the euro area sooner rather than later. Any banking union "has to be thorough, the quality has to be good and then we'll see how long it takes," Merkel said this weekend, Bloomberg reports.

There's also ongoing tension between Germany and Spain over the aforementioned bailout request (or lack thereof) and a big drop in German business confidence reported Monday. Still, losses were modest relative to the big gains on the Continent since mid-summer, when ECB President Mario Draghi pledged to do "whatever it takes" to support the euro. Draghi put his money where his mouth this month, announcing Europe's version of Quantitative Easing.

[Related: Europe's Big Bang: Mario Draghi's Pledge Sends Stocks Surging]

Via what he calls "outright monetary transactions," Draghi said the ECB could potentially buy an unlimited amount of short-term eurozone sovereign debt.

As with the Fed's QE programs, there's a sense Draghi's efforts are having a very limited effect on the real economy in Europe, where PMI data fell to a three-year low last week and German business confidence has fallen to its lowest level since February 2010. But as with QE, the ECB has done wonders for Europe's financial markets, which have surged since late July.

[Related: Bernanke's Bazooka: Open-Ended QE3 Is "Very Aggressive"]

But the similarities end there, says Axel Merk, president and CIO of Merk Investments.

"We have a Fed that has broken the link between monetary policy and inflation by focusing on the employment rate," he says in the accompanying video, taped last week. "In Europe they can focus on narrowing spreads" between the sovereign debts of Italy and Spain vs. Germany.

[Related: Bernanke's Weak Dollar Agenda Won't Boost Growth: Axel Merk]

Merk, who was negative on the euro earlier this year has turned bullish again, thanks largely to Draghi's efforts to "put a process in place" to address the EU's debt crisis.

"There's many ways these things can go wrong [but] there's a lot of upside potential for the euro," he says, predicting the single currency can rise to the $1.40 level vs. just below $1.30 on Friday and around $1.20 at is summer lows.

Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo! Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com

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