Wednesday, 5 May 2010
Headlines and other lines
The Greek story continues to take the headlines and is being used as the explanation for the continued weakening of the Euro. I see no reason to buy the story. When you have finished listening to the news programs and reading the newspapers, all telling that the Euro is doomed, try and think objectively, you might end up reaching a different conclusion.
For starters, it is useful to watch such a thing as the USD trade-weighted index. Since December 2009, this index has increased by 13 percent. So when somebody says that the Euro has weakened by 15 per cent against dollar, 13 per cent of that change comes from a strengthening of the dollar.
Of course, part of that has to do with the fact that the Euro-zone is one of the USA's largest trade partners. But it nevertheless indicates that the talk about "the" European sovereign debt crisis as being the reason for an imploding Euro completely misses the point.
At the outset of the global economic crisis, virtually every major currency weakened against the Euro. Probably many reasons could be given for that, nevertheless the result has been that European exports have suffered and increasingly it looks as if the European economic could enter into a "double-dip". Even if it was not announce that way, the situation looks like a replay of the competitive devaluations of the '30s.
USA, UK, Japan, and Sweden have all pushed some of their economic problems over to the Euro Zone. When the Euro weakens, the member countries of the Euro Zone recover some of their lost competitiveness. Probably this is the reason that no comments at all in order to support the EUR have been forthcoming from ECB or any other quarters in order to reverse the trend. European politicians appear quite happy to see a stronger dollar.
Meanwhile, the US economy appears to have turned the corner and has repeatedly seen growth data well ahead of the expectations. The US trade deficit has shrunk visibly (even if it again trends towards a widening). US corporations are making money and more than widely expected. So buying dollars rather than Euro is not a hard case to sell.
It has also become popular to refer to the PIGS countries when talking about the southern European EU members. Apart from the obviously derogative content of the abbreviation, it also belies the fact that the 4 countries have very different situations and very different problems.
Greece has a huge debt and chaotic public finances. Portugal has a huge debt, but relatively well run public finances, Spain's debt is by comparison low, and the main problem is the soaring unemployment. Italy has a high debt, but did not see a disastrous deterioration of the budget deficit in 2008 and 2009.
Summing all of this up, it means that we should not fear a weaker Euro, as it will only create better possibilities for European exports, and we should not be led to believe that the southern European EU members have uniform problems that require uniform reactions. In particular, their current problems do not threaten the Euro.
If we should begin to look for European fault lines, we could begin to talk about the fact that the productivity differences between the various EU countries have widened markedly in the past decade, with Germany having made the most convincing progress. But this kind of talk does not easily translate into market talk, and is largely ignored.