Feldstein and Goldman Sachs: Making a case for the euro
This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog.
Former European Commission President Romano Prodi this week said the worst of Greece’s financial crisis is over and other European nations won’t follow in its path.
The Sunday Telegraph also reported the European Union (EU) nations were preparing a “bailout package” for Greece that could exceed $34.4 billion as early as Monday the 15th, with Germany and France the main cash backers.
So far, Greece has not sought help from its EU partners. However, an April and May deadline to repay debt has pushed Greece to seek financing of around 20 billion euro on the bond market.
Traders betting big on euro’s decline
EUR/USD pair dance
However, the Greece sovereign debt crisis has switched the euro to the driver’s seat this year as investors fled the euro, seeking safety in dollar-based assets.
Although Europe’s common currency fell against all of its 16 most active counterparts this year, the euro touched a one-month high versus the greenback as stocks gained as concern eased Greece would default, eased.
Greece’s interest rates were subsidized due to an implicit guarantee from the strong members of the euro zone, who were expected to support weaker members in times of trouble.
Buy euro now, says Goldman
Goldman Sachs believes backing from European leaders for Greece’s measures to narrow its budget deficit will provide impetus for more “growth surprises” from the euro region than from the U.S. in the near term.
Feldstein – euro’s fall an ‘overreaction’ over Greece
Perception and sentiment rules short-term
Nevertheless, perception and sentiment are always a moving target. Once uncertainty and fear prevail, “growth surprises” of the euro should quickly evaporate.
Structural weakness weighs long term
“…one-size-fits-all monetary policy has fueled big deficits as countries’ fiscal records differ.”
While Société Générale SA strategist Albert Edwards noted:
“Any help given to Greece merely delays the inevitable breakup of the euro zone…. the need to tighten deficits is a particular issue for the U.S. and U.K….There will be more crises to follow Greece, both inside and outside of the euro zone.”
Expect further euro weakness
Fitch Ratings Agency has already expressed caution over the medium-term outlook for Greece, while there is also evidence of increased tension within the Greek government on plans for budget cuts.
Dollar worries more than euro
“If I want to be more nervous about the future of a currency over the next five years, it is more reason to worry [about] the dollar…given the size of the U.S. trade and account deficit.”
Indeed, one could easily draw a parallel between the U.S. federal government and the EU. The U.S. government will most likely have to bail out certain states such as California and Illinois, which is not that different from the EU having to bail out weaker member countries.
And states such as California, Illinois, New Jersey and New York dwarf Greece and other European debtor nations in economic importance in terms of income, output and consumption.
On that note, it is not that far-fetched that the United States, similar to the euro zone in size and equally deep in debt, could face its own sovereign debt crisis at some point of time.
A Race to the bottom with euro winning
The overall mood of risk aversion should continue to support the dollar, and there will still be expectations that the U.S. will outperform the euro zone over the coming months, which will tend to underpin the dollar.
This trend, however, will most likely put a damper on President Obama plans to double U.S. exports over the next five years, as the dollar now has the euro to contend with for the global export advantage.
“Reality doesn’t bite, rather our perception of reality bites.” ~ Anthony J. D’Angelo
Source: Dian Chu, Economic Forecasts and Opinions, March 15, 2010.
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