A Goldman solution for Europe?

Mario Draghi sounded very Goldman Sachs when he said the ECB will do whatever it takes to preserve the euro. That sounds like money printing the likes of which the world has never dreamed.

Will former Goldman Sachs executive Mario Draghi, who is now boss of the European Central Bank, introduce a Goldman Sachs type solution to Europe?

Last night market bulls recounted that it was Goldman who helped Greece rig the books and borrow big sums. While the Greek book rigging did not happen while Draghi was at Goldman, Draghi is a banker from Italy, where Club Med rules have always been the order of the day.

To change the current downward momentum spreading around the world is going to require a global money printing exercise the like of which the world has never dreamed of.

Last night Mario Draghi sounded very Goldman Sachs when he declared that the European Central Bank "is ready to do whatever it takes to preserve the euro. And believe me it will be enough." That means buying bonds like there is no tomorrow and printing the money to do it.

In Australia we have a huge stake in this exercise. Today’s KGB Interview with Deloitte Access Economics chief Chris Richardson makes it very clear that on the assumption that the euro does NOT split, Australia will see the present mining investment boom slashed when current projects are completed towards the end of 2014. But before that, depressed commodity prices will affect government revenues and will likely cause our dollar to fall.

Richardson says miners around the world have substantially increased the supply of minerals ahead of likely demand and Australia has become a much higher cost producer.

Accordingly, Wayne Swan’s 2012-13 budget surplus is not going to be achieved without further government action.

But if there is a split in the euro which puts the global banking system under great strain, then the consequences to Australia will be far more serious. Richardson does not believe the euro will split.

Austerity in Europe is really starting to hit American and European profits. The Wall Street Journal reports that Ford and Apple both pinned some of the blame for disappointing results on sluggish spending by European consumers – and in Europe ArcelorMittal and GlaxoSmithKline say they’ve taken a bigger-than-expected hit on their home turf. Alcatel-Lucent is cutting 5,000 jobs as European phone operators put off network upgrades.

There is a vicious circle in Europe, as government austerity leads households to cut spending, which lowers tax receipts and leads to more austerity.

That vicious circle is what Mario Draghi has to break to avoid a split in the euro.

But in Germany they teach their school children the evils of money printing because of the dangers of hyper-inflation. German children are reminded of the Weimar Republic to illustrate what happens. Earlier this year I described what the Weimar Repulic horror was like (A Weimar warning for Greece, May 18).

Fascinatingly, during the Weimar Republic period of hyper-inflation there was a boom in shares, which leads us back to Goldman Sachs. The Germans will not want this to happen.