Posted by butalidnl on 31 May 2010
These days, if you watch CNN (and most other American or British media) you would get the impression that the Euro is about to collapse as a currency; and that European countries will have to reinstate their old currencies. It is truly amazing how the Americans especially have fooled themselves into believing that – and now, they are panicking at the possible effect a fallen Euro will have on their investments.
Well, I think this is quite ridiculous; but don’t take my word for it, look at the facts.
Greece Crisis is Over
In the first place, the crisis with Greece is over. The Greeks have implemented deep cuts in government expenditures, and the rest of the Euro zone (and the IMF) are granting them enough loans to be able to rollover their existing debts for the next three years. After 3 years, Greece will still have a deficit, but this will be more manageable; and there would be enough safety nets in Europe to be able to ensure that Greece could rollover their debts easily by that time.
Structural Problems with Euro are getting addressed
In the meantime, Euro zone countries have put up nearly a billion dollars worth of loans and loan guarantees in a special fund to be able to aid other Euro zone countries who might come into trouble with their deficits and debts. This is a fund which is more than the US’ TARP funds that were used to save the US banking system. I believe that this fund is big enough for any problems Euro zone countries could face.
And then, the European Central Bank (ECB) has been given authority to buy up bonds from individual countries. This means that the ECB will in effect be doing “quantitative easing”, or printing money to be able to rescue member countries, if this is deemed as necessary. Of course, I expect that the ECB will use this new authority rather sparingly. The US Fed and the Bank of England has been using “quantitative easing” quite a lot these last couple of years.
In addition, various southern Euro countries have cut back on their expenses, way before the markets have any chance to attack them, like they did with Greece. In recent days, Italy, Portugal and Spain have announced new budget cutbacks (including cutting the salaries of Cabinet officials) , showing the world that they are taking serious steps to reduce their budget deficits.
And there are continuing discussions among Euro finance officials to set up a mechanism to ensure that countries do not exceed the 3% limit for budget deficits.
So, with the concrete causes of the crisis avoided, why are Americans panicking about the Euro? Well, I will attribute it to two things; first, it is to the interest of those who speculated against Greece or Spain to somehow make a profit. Rumours may not cause the bankruptcy of Greece or Spain, but they will maintain the price of their put options or Credit Default Swaps (CDS); the price of these will not go down as long as some people think that there is a chance of default.
And second, is that Americans do not understand the mechanics of European decision making. When Angela Merkel of Germany talks about the possible fall of the Euro, this may be true, but only in the long term. For domestic consumption, though, she would be quite grave about it, so that parliamentarians will be forced to support the various rescue programs etc. However, this is the way Europeans come up with common policy. European politicians are known for their brinkmanship, and their hyperbole especially towards domestic audiences. Then, they sit down together in marathon sessions, and viola – they agree on a solution, at the last minute.
We in Europe are used to this kind of brinkmanship and hyperbole of our leaders. We may be concerned about the Euro, but we know that most of the problems are on the longer term, and that our officials are well on their way to solving them. So, we don’t worry too much about it. But Americans are a panicky lot – they think that the Euro is about to fall apart, that Spain is about to default, and as a result they withdraw their portfolio investments from Europe. This consequently lets the exchange rate of the Euro fall, and then the Americans panic even further – thinking (correctly) that this will decrease European demand for American products.
Well, Europeans don’t worry about their Euro falling apart any time soon. True, the devalued Euro may make imports more expensive and make travel outside Europe costlier; but exports are booming, and imported products are low-priced anyway as it is, and they just need to plan their vacations within Europe instead of to more distant destinations.
So, for as long as it lasts, Europeans are going to enjoy the low value of the Euro. Of course, this can’t stay this way forever, especially with the growing surplus trade with the dollar zone. But it will be nice, for as long as it lasts. Actually, if I were an American, I will be well advised to buy European stocks or bonds now, while the Euro is still low; I will be sure to make a big profit in a year or so, when the Euro will be back to more “normal” levels.