Is the Euro Crisis Back???

All it seems to expose on the mirage of ECB Draghi’s jawboning communication strategy has been the recently concluded elections in Italy.

From Ambrose Pritchard of the Telegraph, (bold mine)

The Five Star movement of comedian Beppe Grillo, which won 25pc of the vote, has called for a euro referendum and has a return to the lira as one of its manifesto pledges, while ex-premier Silvio Berlusconi has threatened to pull Italy out of the currency bloc unless the EU switches to a reflation strategy.

Even if the centre-left leader, Pier Luigi Bersani, can put together a “grand coalition” with Mr Berlusconi, there is no going back to the hairshirt regime imposed by Mario Monti’s technocrat government at the EU’s behest over the past 15 months…

The great fear is that the European Central Bank (ECB) will find it impossible to prop up the Italian bond market under its Outright Monetary Transactions (OMT) scheme if there is no coalition in Rome willing or able to comply with the tough conditions imposed by the EU at Berlin’s behest. Europe’s rescue strategy could start to unravel.

Meanwhile, French Industry Minister Arnaud Montebourg has called for the ECB to work on the weakening of the euro through debt monetization.

Here is a noteworthy quote from Minister Montebourg from the same article: (bold mine)

“I am expressing personal sentiments here but the debate has started within the euro group on the euro being too strong and the role of the ECB,” he said. “We have to look at what’s going on the world. All central banks that are doing their job are doing it this way.”

The central banking inflation creed has been deeply embedded on the mindset of political agents and has become a populist political selling point.

Following Italy's elections, euro spreads have began to widen…

chart from Bespoke Invest

…as the euro and European stocks (Stox 50-lower and Dow Jones Italy-behind) plummeted. (charts from stockcharts.com)

And given the expressed desire to revert or “return to the lira” or switch to a “reflation strategy” or for a weakening of the euro from Italy’s politicians, as well as, from the French Industry Minister, this means the prospects of more inflationism…

And as I recently pointed out, the recent collapse of gold prices have been tightly linked with the contracting balance sheet of the ECB.

But such dynamics seems to have turned the corner or that the recent bounce of gold may signal or signify anticipations of more inflation from the ECB.

By closing 1.2% higher last night, Gold has reclaimed the $1,600 price levels, particularly at 1,612.

Like US counterpart, ECB’s Mr. Draghi seems to be boxed into a corner: either inflate or the lira will make a comeback.

Will current political developments in the Eurozone compel Mr. Draghi to relax on the strict conditionality he has imposed on crisis stricken nations in order to activate the yet to be tapped Outright Monetary Transactions, or OMTs?

We are living in interesting times.