The euro crisis may never end

The euro crisis may never end

Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 7th of March.

A crisis takes much longer time coming than most of us thinks and then precipitates faster than most would have thought. Perhaps, there’s not much hope left for the euro though the common currency saga may continue for a while now. Here are the reasons why:

The inconclusive Italian elections are a serious setback for euro enthusiasts. Though many argue it was a vote against austerity, in reality it a dissenting voice against the elected leaders because it doesn’t benefit the ordinary Italians. And there is no political will to introduce the structural reforms needed to get Italy out of the fiscal mess.

The disagreement over monetary union between two of the biggest economies in the currency-zone, Germany and France, are widening. While Germans demand competitiveness, France wants solidarity.

Also Germany is not a position to haul the peripheral countries out of the abyss because it can not and will not stimulate its economy sufficiently. In contrast to the successful German reforms during 2003-05, there are no external growth impulses offered by Europe for the peripheries to cushion the painful domestic reforms.

Additionally, German Chancellor Angela Merkels inhibitions against taking bold euro repair initiatives will only grow before federal election in September. Contrary to popular perception outside Germany, the Germans have been quite generous about helping other countries. However, we have probably passed the high-point of German readiness to bail out others as payout fatigue sets in.

The southern states still see enormous barriers against departing from the euro. There is no reason for them to leave as long as cheap money keeps flowing from the ECB and the IMF. They can’t be forced out of the union either. Similar arguments apply to any German readiness to leave the bloc unilaterally. The perfect stalemate may continue for some more time as the economic and political fallout of such a withdrawal will be earth shattering. But, the end will come sooner than many had imagined.

Other economic powers such as the US, China or Japan are unlikely to step in or press for radical remedial measures. Why risk raising a firestorm that may lead to appreciation of their currencies and jeopardise the recovery process? Each country is too preoccupied with its own problems and is unlikely to force Europe to get its acts together.

Finally, it is nearly impossible for the ECB to intervene and try its untested medicine, the OMT, in Italy, in the absence of an elected government. If it chooses to buy Italian bonds without the accompanying government-agreed reforms, that would be a 180-degree turn of its oft repeated promises by ECB President Mario Draghi. A German revolt may follow and much of what has been achieved so far will be swept away.

The bitter truth is we should prepare ourselves for tougher times.


GBP/EURO – 1.1518
GBP/US$ – 1.4992
GBP/CHF – 1.4194
GBP/CAN$ – 1.5442
GBP/AUS$ – 1.4612
GBP/ZAR – 13.6361
GBP/JPY – 140.76
GBP/HKD – 11.6024
GBP/NZD – 1.8102
GBP/SEK – 9.5998

EUR: The shared-currency dropped against the US dollar yesterday, dropping below the 1.30 level, but advanced against sterling amid speculations that the Bank of England will expand its balance-sheet further. The revised GDP iteration from the euro-area as a whole came out as expected with a decline of 0.6 percent for the fourth quarter of 2012. We have the all-important European Central Bank interest rate decision and the associated press-conference today along with German factory orders and Spanish & French 10-year bond auction results.

USD: The dollar gained traction against its rivals yesterday after the ADP employment data showed the US private sector added 198k employees in February, more than the 175,000 forecast by economists. The reading for January was also upwardly revised, pushing the greenback higher against the euro for the first time in three days. The Federal Reserve’s so-called Beige Book showed economic activity continued to grow at a ‘modest to moderate’ pace with notable improvement in the labour market. Markets reacted favourably with the Dow Industrials rising to a new record high. Cable fell below the 1.50 amid speculations of further monetary stimulus from the Bank of England. No UK data is due today while we have trade-balance figures, unemployment claims and productivity data from the other side of Atlantic. The US bank stress-test results due for release later in the day and can cause choppiness in the currency market if results are found particularly bad.

Have a great day!


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