Do eurozone leaders need to keep failing?
We are told that eurozone finance ministers meeting yesterday and today (with other EU ministers) in Brussels are keen to put the crisis in the single currency behind them.
Well, maybe. But you could argue that they shouldn't put it too far behind them. Why? Because across the eurozone, governments are pinning their recovery hopes on a weak euro. And in 2011, most analysts are expecting the euro to go up.
Arguably, the only way to stop the euro from strengthening, in the current global environment, would be for ministers to continue to mismanage the crisis. In other words, to support the real economy, they need to fail to put at least some of the markets' worries to rest.
Naturally, I am being a little facetious. But I have been struck by the number of city forecasters predicting that the euro will go up in 2011. Goldman Sachs, for example, is betting that one euro will be worth $1.50 by the end of this year.
The logic is not so much that Europe is strong - more that the dollar has to fall for the US current account deficit to come down. And of course, monetary policy is also on the side of the euro. Jean-Claude Trichet's remarks last week confirmed that the ECB is a lot closer to raising interest rates this year than the Federal Reserve.
You have to imagine the euro would have strengthened a long time ago, had it not been for Greece, Ireland and the rest. There was a relentless rise in the value of the euro against the dollar in the first years of the single currency, peaking just shy of $1.60 in the summer of 2008.
It fell sharply in the wake of the crisis, only to creep up again in 2009, when European investors were bullish, and no-one was paying much attention to what was going on in Athens - or Madrid.
By the end of November 2009, the euro was back up at $1.50. But then, the world discovered the PIIGS. Bad news for Greece, Ireland, Portugal, Spain and the rest, and anyone holding their government debt - good news for the eurozone's exporters, especially the German ones.
The longer eurozone policy makers fudged and delayed, the more competitive German exporters became. At the end of May 2010, the euro was down at $1.20.
Since then, the currency has been even more closely linked to ministers' ability to keep a grip. Amazingly, it was back at $1.40 at the end of the year, as traders briefly stopped worrying about Portugal and Spain. Then it slumped again - falling again, today, on fears that ministers would not make much headway on proposals to expand the eurozone's new bailout facility - the EFSF - and/or make it more nimble in response to market shocks.
I don't think that the eurozone's finance ministers are failing to resolve the crisis on purpose. It's not as if this is an easy problem to fix. And of course, a full-blown panic over Europe's sovereign debt would do far, far more damage to Europe's financial system and its economy than a rise in the value of the euro. And this degree of volatility in exchange rates does no-one any good - exporters least of all. Still, in this "race to the bottom" among the major currencies, Europe's knack for crisis mis-management may be the strongest weapon it has left.
~RS~q~RS~~RS~z~RS~16~RS~)
I'm 
© MMXI
Comments
Sign in or register to comment.
It is not clear how a devalued Euro would help Eurozone countries fund their sovereign and domestic banking debts. The debt funding/confidence problem is far from over and failure to correct it would have far reaching effects on the recovery of most Euro zone countries. I would expect Ireland and Greece now cast into a downward economic spiral to need another bail out which could precipitate wider worries in the zone and beyond including the UK which is more cautiously following the same deflationary path.
Complain about this comment
Any chance of framing your blogs with UK context in mind, I am concerned about Europe but mroe so from a "How will it effect the UK" standpoint that anything else.
A strong Euro is good for our exports, but bad for our imports, I assume idealogically we want a weaker Sterling:Euro ratio but practically this is gonan drive yet more imported inflation?
Complain about this comment
Stephanie,
You are quite right a policy of passive devaluation will help Europe (and the UK) to ratchet up its economic activity.
The question is of balance; too much currency devaluation and you get into a worthless currency downward spiral, too little and the currency may rise to make your exports too expensive.
It is however inescapable that monetary policy management needs to be accompanies by a degree of fiscal regulatory coordination within Europe (and not just the Euro Zone).
The UK needs to be a strong and well integrated part of of the EU - for our own benefit. Commentators who bad mouth the EU for ideological reasons should recognise the huge economic damage they are doing to the UK.
Complain about this comment
Wow ! Ms Flanders. A thunderously cynical blog by your standards.
Not Management by Crisis. But Management by Mismanagement...or... Wirtschaft durch Misswirtschaft.
Ms Merkel must adore you Ma'am
PS Was that a big black ring I saw on your finger the other day on YouTube , or a knuckle-duster ?
Complain about this comment
Naturally, I am being a little facetious. But I have been struck by the number of city forecasters predicting that the euro will go up in 2011. Goldman Sachs, for example, is betting that one euro will be worth $1.50 by the end of this year.
Back to my trusted mantra.
Time for the UK to join the Euro.
Complain about this comment
There was a relentless rise in the value of the euro against the dollar in the first years of the single currency, peaking just shy of $1.60 in the summer of 2008.
...................................................................
I do seem to remember the Euro falling to US 87 cents in early days.
Complain about this comment
Just another lull before another storm!
Complain about this comment
View these comments in RSS