The decline in the Euro FX does more than reflect Europe’s sovereign debt and banking crisis. Europe does not stand or act alone. Euro currency weakness underlines the continuing epic worldwide economic disaster that emerged in 2007. The sustained slump in the Euro FX since spring 2011 warns that the worldwide economic recovery that began around early 2009 is slowing. Some headway has been made in containing Eurozone (and other European) problems, but that progress has been insufficient and it probably will remain so for at least several more months. The Euro FX will depreciate further from current levels.
First, despite the major sovereign debt and banking problems, the Eurozone’s political and economic leadership has the political desire and (ultimately) sufficient economic power to preserve the Eurozone. This means keeping even members such as Greece within it. The problems of the so-called peripheral nations in key respects have become those of the entire fraternity. The Eurozone may rely on outside economic help from the International Monetary Fund or other countries to help pay for the repairs. However, the region as a whole will, “if push comes to shove”, resolve the thorny difficulties itself. And even if Greece did exit the Eurozone, remaining Eurozone members probably would band together to keep the Eurozone intact.
For some time, the so-called fixes may involve pushing the problem (dangers) off to a more distant future. The buying-time strategies (hoping that economic recovery eventually will enable a genuine escape) of course will have some costs. For example, picture inflation risks, slower growth, and some suffering by creditors.
The substantial role of the Euro FX in official reserves underlines the importance of the Eurozone and its Euro FX in the world economic order. Most of the world surely does not want the Euro FX to disappear entirely, or to suffer a massive depreciation (as opposed to a further small or even a modest depreciation). Thus at some point (“if really necessary”), the world outside of Europe would ultimately bail out Europe.
Consequently the declines in the Euro FX over the past several months confirm worldwide economic sluggishness (and slumps in stock marketplaces and commodities). So further falls in the Euro FX may reflect- or help lead to- even more declines in equity and commodity playgrounds. That additional Euro FX debasement may even reflect or accelerate an economic downturn (not just stagnation) in some regions, and not just European territories. Thus Euro FX currency depreciation alone will not solve the Eurozone’s (or overall European) problems.
FOLLOW THE LINK BELOW to download this market essay as a PDF file.