With European economies mired in recession, is the euro living on borrowed time?
- The rebound in the euro is simply the flip side of the US dollar being undermined by uncertainty about the presidential election. The monetary muddle in Europe won’t help the currency after the dust settles in America
Given the way the euro has been rallying in the foreign exchange markets over the past three months, you would be forgiven for thinking the currency has become a beacon of stability in uncertain times. You couldn’t be further from the truth.
The rebound in the euro is simply the flip side of the US dollar being undermined by growing uncertainty about the upcoming US presidential election in November and how the US authorities are coping with the coronavirus crisis. Global investors are simply taking time out from long dollar exposures, and euro bulls are simply filling a temporary void. It won’t last long.
Despite close to 3 trillion euros of assets purchased so far under the ECB’s quantitative easing programme and interest rates steeped in negative territory, the economy of Europe is showing precious few signs of a return to normality.
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These days, Frankfurt’s fiduciary responsibility seems to have been quietly abandoned in favour of political expediency, economic survival and a softening in standards. The ECB has abandoned Germany’s monetary rigour, spending its way out of recession through debt monetisation and underwriting Europe’s explosive fiscal expansion in the process. The forefathers of the Deutsche Bundesbank would turn in their graves.
The worry for markets is that the triple-A-rated ECB’s vaults are bursting with a surfeit of lower-quality debt from nations like Italy, Spain, Portugal, Greece and Ireland, countries which have required support in times of market stress in the aftermath of the 2008 crash.
Like in the US subprime crisis, it’s fine while the charade lasts, but once confidence begins to wobble, that is where the danger lies. It’s a bit like the tale of the emperor’s new clothes – once someone calls attention to the reality, the pyramid of risk starts to implode.
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China would be joined by a mighty throng of official and private sellers in the worst-case scenario. It could turn into a nasty bloodbath with euro-zone policy unity tested to breaking point.
The euro is only being supported by a weaker dollar right now, but the tide could turn abruptly for euro bulls before long. ECB coffers are not a bottomless pit and Germany’s patience might not be guaranteed forever. High noon is creeping up on the world and global investors must take care.
David Brown is the chief executive of New View Economics