Former ECB Board Member Bini Smaghi Says Draghi Will Weaken Euro

Former European Central Bank Executive Board member Lorenzo Bini Smaghi said policy makers led by President Mario Draghi will act to weaken the euro.

“They have to find ways to avoid that the euro appreciates and actually try to make it depreciate,” Bini Smaghi said in an interview on “Bloomberg Surveillance” with Sara Eisen and Tom Keene today. “They will do something, I think that’s unavoidable.”

The euro fell as Bini Smaghi spoke, dropping to $1.3124 at 2 p.m. in Frankfurt from $1.3153 beforehand. The euro has climbed more than 2.5 percent against the dollar in the past three weeks as the ECB refrained from adding to stimulus while counterparts in Japan and the U.S. employed loose monetary policies to spur growth.

Europe is weaker than Japan and the U.S. so the euro should be weaker,” Bini Smaghi said. “But if we look day by day, it’s actually been strengthening, especially after what happened in Japan.”

The Bank of Japan on April 4 announced a doubling of its monthly bond purchases and set a two-year horizon for achieving its goal of 2 percent inflation, prompting the yen to slide against all of its main counterparts. The Federal Reserve is also engaged in so-called quantitative easing, buying $85 billion of government and mortgage debt each month in a bid to spur growth and boost employment.

While the ECB has pledged to buy the bonds of distressed euro-area nations if yields are unjustifiably high, it requires them to sign up to strict conditions and no governments have applied for the aid.

ECB Struggles

The Frankfurt-based ECB is struggling to find new ways to help the 17-nation euro economy shake off its second recession in four years. While Draghi signalled this month that policy makers are considering cutting interest rates further, he said they haven’t yet come up with a plan to get banks lending to small and medium-sized businesses -- something the ECB has long identified as an area of economic weakness.

Bini Smaghi said there’s no point in the ECB engaging in QE like the Fed, as that would involve it buying the sovereign bonds of countries like Germany, which already have record-low borrowing costs.

To contact the reporter on this story: Matthew Brockett in Frankfurt at mbrockett1@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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