Too much emphasis on the Euro in trouble
Posted on May 18, 2010 by john
The week starts with the weak euro. Against the dollar, except the period of confusion after the failure of Lehman, has never been so low since April 2006. The emphasis on the European exchange rate crisis is exaggerated, however: when he was just a little stronger, was said to be overvalued. Measured in dollars, euro rate is 6% higher than its average value since there.
And is less than 8% lower than a year ago and the average of the last five years. It is therefore not appropriate to dramatize forgetting, inter alia, that there is a crisis in the value of coins in their entirety: last year the dollar value of gold fell by 25%.
A temporary retreat of the euro exchange rate is natural. The measures in support of public debt in some countries have extended the period during which the ECB interest rates are expected to remain very low, making the euro less attractive. Also, if budget cuts will actually be launched in different countries, slightly lower than the change may have some utility for the whole euro area, helping their competitiveness and facilitating quick replacement of decreased public demand with increased exports net.
Then there are strange whispered that the euro is weak because it could discard. Reappear coins that were the weakest, but it could also disdainfully revive the German mark. These are plausible scenarios where the technical and policy is far overrated by the person speaks, usually without sufficient expertise. But the most important thing is to remember that such developments would not have to win just for anyone. All countries of the euro area and, ultimately, all EU countries have to integrate more and more interest in their products, their businesses and their finances is the only and most natural way they can challenge global competition. Replace the euro coins go back to devalue and revalue would perhaps some ephemeral advantage for a short time, the competitiveness of countries weak and strong immunity from any country from the contagion of international problems of illiquidity and insolvency. But all would soon be in great disorder, 70s style: increase dell’indisciplina monetary violent swings in exchange rates, high inflation and different cutting real wages, contraction of trade flows as a disincentive to improve production, the most destabilizing speculation today reintroduction of restrictions on international flows of capital. In the shadow of those bans the large debtors, especially the government, would suck facilitated savings of creditors, especially families. If the euro area, since there is growing less as it could, it is certainly not blame the euro, but its lack of flexibility in exchange rates of national currencies.
Regarding the relationship with the dollar, the U.S. has the advantage of a unique government behind their debt and their money more freely and can print so many dollars to repay bonds coming due, in part because the world seems still accept them as reserve currency and as a tool of international payment by far the most used. But the prospects for public finances are worse than the euro area average. Which did not suffer from major imbalances in payments to the rest of the world, while U.S. foreign trade has more than two decades a large structural deficit and the productions have not yet reorganized to reduce it within sustainable limits. Fiscal and monetary stimulus continues unabated and is returning to the U.S. economy to grow artificially. After the collapse in the early part of last year, U.S. imports have increased at the rate of almost 25%, much quicker than exports. It ‘difficult to prove that the dollar is not overvalued, at least compared to the average of other currencies in the world.
Since last week, Europe has net signs of wanting to tackle the crisis with a new look and greatly increase the coordination of economic policies and its finances. Adopted the concept of a large fund to support public finance of the countries most indebted and less competitive, has obtained the commitment of these cuts and to accelerate reforms, has prepared a plan for revitalizing the market, has set radical reform of the Stability and Growth Pact, has accelerated the debate on regulatory reforms and financial supervision. The objective is to realize many of these changes before the end of the year. Meanwhile, the ECB supports the liquidity of the market trying to avoid accelerating inflation in the money supply. Despite the split style of some political leaders and financial, it is difficult to imagine a clearer recovery of economic and European policy. And ‘a recovery that comes later and is now more intent than a realization. It must be shown immediately that you seriously, both tables in Brussels and national governments and parliaments. The agenda is full of of European emergencies, dense and ambitious deserves to be followed, even by the foreign exchange market, with critical attention, but for now, with confidence.