The Euro Rollercoaster Shows No Signs of Letting Up After Two Years
With every passing day, the ongoing European debt crisis continues to dominate news headlines and rock our financial markets with uncertainty. Following the recent European debt summit that was designed to calm the waters for at least a week, the glow suddenly faded as comments began to leak from meeting attendees. In the absence of these leaks, financial news editors would more than likely have delivered a similar blow. Controversy does get ratings and sells newspapers.
A crisis is supposed to be a signal of an imminent disaster, but this storyline has been plaguing our lives for over two years. It was actually November of 2009 when news began to surface related to potential deficit problems in Greece. When the true crisis broke in May of 2010, the full breadth of the problem was revealed, together with the prospect that the other “PIIGS” (Portugal, Ireland, Italy, and Spain) would soon follow with debt defaults and the need for significant bailout funds.
During this period, the vaulted Euro has had more dips and turns than an amusement park rollercoaster, as depicted in the diagram below:
From the turn of the millennium, the rise of the Euro has dazzled everyone and made more than a small number of currency traders handsomely wealthy in the process. It was originally thought that this “newer” version of many previously failed attempts would test “parity” with the U.S. Dollar, but that goal was achieved very early on after conversion. The Euro appreciated to $1.60 by June of 2008, fell to $1.25 following the collapse of Lehman Brothers, and then recovered to $1.50 before the Greek tragedy took center stage.
One more thrashing knocked the Euro from its new perch down to $1.18, but like a Phoenix rising from the ashes, it has recovered nicely over the subsequent period without the enactment of any of the major structural changes that politicians and economists alike have suggested as the only real solution for the problems at hand. Previous economic coordination attempts in Europe have generally failed due to the lack of centralized power over national budgets. Left to their own devices, countries could paper over national deficits with new bond issues, as long as the market was willing to buy the debt securities.
That market willingness has nearly evaporated, and the market can be very cruel in how it meats out its own form of justice. Austerity measures have been foisted on weak member states, with GDP growth seen as the true cure for all ills. Growth in Europe, however, cannot be foretold by any Greek oracle, let alone be generated under current economic conditions. GDP growth in 2011 has been near zero and is expected to be lower in 2012.
Through all of this hand wrangling, the Euro remains fixed at the same value as it started with in January, roughly $1.30. If open interest information from our futures markets are any valid indication, currency speculators, both commercial and retail, have severely shorted their future positions in the Euro. This repositioning began in August and shows no signs of reversing.
What will reverse the tide of the Euro? Current proposals entail more bailout funds or central ECB bond issues, just another way to expand the money supply and dilute the Euro. The Eurozone treaty does not provide for revenue sharing. Exporters in Germany and France have benefited from the Euro, but tourism has suffered as a result in the weaker southern member states.
Sounds like the same “Haves” and “Have-nots” debate that is “boiling” on this side of the Atlantic.