European Central Bank

How did German Chancellor Angela Merkel and French President Nicolas Sarkozy (“Merkozy”) manage to convert a really scary story into a happy tale that has been so wildly bullish for stocks and commodities during the month that ends with Halloween? That’s a very good question.

Perhaps the simplest explanation is that investors have concluded that the latest Grand Plan to save the euro fashioned by Merkozy is just as flawed as the one that was dead on arrival on July 21. So the inevitable solution to the Euro-Mess is to have the ECB clean it all up.

In other words, the mantra in financial markets is now, “Ease, Mario, ease!” Last week, in the October 25 FT, Martin Wolf led the chant in his column titled “Be bold, Mario, put out the fire.” He wants incoming ECB President Mario Draghi to implement a program of quantitative easing. The only problem is that Article 123 of the Treaty of Lisbon (2007) prohibits the ECB from doing just that.

Nevertheless, the ECB has started doing it again for a second time. The bank’s balance sheet rose to a record €2.3 trillion on October 21, up €440 billion from a 2011 low of €1.9 trillion on April 8. This expansion was attributable to the ECB increasing its loans to euro area financial institutions by €177 billion to €585 billion. In addition, the ECB’s holdings of euro area bonds rose €110 billion so far this year to a record €567 billion. In the ECB’s first round of QE, the bank’s balance sheet soared by €512 billion to €2.0 trillion during the four weeks through October 17, 2008.