Perhaps this period will be looked back upon as the Draghi Deflation. After nearly 10 years of this failed policy, the European banking industry is contracting on every possible level. The merger of Commerzbank to Merge with French BNP is one possibility. Commerzbank is a takeover candidate or shotgun wedding candidate, for good reasons. Its shares have fallen and are trading now at half their book value. When interest rates rise to bring back deposits, then the bank could perhaps get out of its deep hole. The German government, which has a 15 percent stake after a bailout in 2009, is ready to sell looking to raise cash itself.

The Draghi era of negative interest rates has proven to be a complete disaster. People have withdrawn money and preferred to buy safes. Major banks with branches in the USA have shipped their cash to the American branch and deposited at the Fed in excessive reserves. Meanwhile, with deflation dominating the European economy and rising taxation, the average person is just not interested in borrowing until they see the economy turn around.

On top of these issues, to survive, European banks have been withdrawing from proprietary trading, firing expensive staff with experience, and replacing them with inexperienced kids. Additionally, the low-interest environment and the decline in deposits has resulted in a major contraction in bank branches. As banks also move to online banking, they have been able to reduce staff. In 2016, the banks let go some 50,000 jobs. They were also able to close some 9100 branches throughout the EU, according to the European Banking Association.Consequently, now the banking work force has been reduced to 2.8 million people contracting back to 1997 levels. We will most likely see a further reduction of at least 5% going into early 2018. We will see further mergers and consolidation reducing jobs and branches into 2020.

According to a the latest spin, the German federal government’s withdrawal from the Commerzbank has left the favored shotgun wedding merger. Commerzbank is the Frankfurt money house which will be merged with the French BNP Paribas. This is being presented as if it were a strong German-French merger which is suggesting that there is a deeper European banking union unfolding. Additionally, they are also going to merge a troubled Italian bank into BNP.

Behind the curtain, the concern is that Commerzbank could not be merged with Deutsche bank because they have the same portfolios that are in trouble. BNP Paribas is about 10 times the size of Commerzbank. Therefore, the real world view is this is just a shotgun wedding rather than a new German-French merger.

QUESTION: Hi Martin,

QUESTION: I notice you often cite the *Plaza Accord* when on the topic of central bank currency manipulation. That accord was signed in 1985 with an aim to devalue the USD. Could you write a little on the *Louvre Accord” signed just two years later, in 1987, with an aim to reverse the unwanted effects of the *Plaza Accord*. Thanks – cheers,

TGM

ANSWER: The Louvre Accord was an agreement, signed on February 22, 1987 in Paris, that aimed to stabilize the international currency markets and halt the continued decline of the US Dollar caused by the Plaza Accord. The agreement was signed by France, West Germany, Japan, Canada, the United States and the United Kingdom. Italy declined to sign the agreement.

The G7 meeting of central bankers and finance ministers in Paris announced that the dollar was now “consistent with economic fundamentals.” The announced that they would only intervene when required to ensure foreign exchange stability. The objective was then to manage the floating currency system. Democrats gained control of Congress in 1986 and immediately called for protectionist measures. The dollar depreciation agreed to in 1985 at the Plaza Accord, failed to really improve the trade perspective. In 1986, the trade deficit actually rose to approximately $166 billion with exports at about $370 billion and imports at about $520 billion. The object of manipulating currency to try to create jobs and alter trade flows proved to be completely false.

My concerns warning that volatility would increase made back in 1985 were materializing. What they did not understand was the lowering the dollar in value also led to a shift in capital flows and the selling of US assets. Foreigners were suffering loses by financing U.S. trade through purchasing United States Treasury bonds in an attempt to ease the trade deficit criticism. We were advising Japanese to buy gold on the New York COMEX, export it, and then resell which would also make it appear that the US exports were increasing. However, the lower dollar was then resulting in the importation of inflation into their own nations.

We can see that first of all the dollar had already begun a decline prior to the Plaza Accord in August 1985. By the time we arrived at the  Louvre Accord, you can also see that the dollar continued to decline. The attempt to manipulate the foreign exchange markets proved to beyond the capacity of the G5 which had been expanded to G7 and today is now G20. We can see the capital flow data between the USA and Japan began to move in early 1984 establishing the trend that nobody seemed to pay attention to at that moment.

The price action of the dollar clearly proves that the central banks lacked the power to truly influence the markets. The trend had begun prior to the Plaza Accord and it continued to decline following the Louvre Accord.