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Do eurozone leaders need to keep failing?

Stephanie Flanders | 08:37 UK time, Tuesday, 18 January 2011

We are told that eurozone finance ministers meeting yesterday and today (with other EU ministers) in Brussels are keen to put the crisis in the single currency behind them.

Euro coins and notes

Well, maybe. But you could argue that they shouldn't put it too far behind them. Why? Because across the eurozone, governments are pinning their recovery hopes on a weak euro. And in 2011, most analysts are expecting the euro to go up.

Arguably, the only way to stop the euro from strengthening, in the current global environment, would be for ministers to continue to mismanage the crisis. In other words, to support the real economy, they need to fail to put at least some of the markets' worries to rest.

Naturally, I am being a little facetious. But I have been struck by the number of city forecasters predicting that the euro will go up in 2011. Goldman Sachs, for example, is betting that one euro will be worth $1.50 by the end of this year.

The logic is not so much that Europe is strong - more that the dollar has to fall for the US current account deficit to come down. And of course, monetary policy is also on the side of the euro. Jean-Claude Trichet's remarks last week confirmed that the ECB is a lot closer to raising interest rates this year than the Federal Reserve.

You have to imagine the euro would have strengthened a long time ago, had it not been for Greece, Ireland and the rest. There was a relentless rise in the value of the euro against the dollar in the first years of the single currency, peaking just shy of $1.60 in the summer of 2008.

It fell sharply in the wake of the crisis, only to creep up again in 2009, when European investors were bullish, and no-one was paying much attention to what was going on in Athens - or Madrid.

By the end of November 2009, the euro was back up at $1.50. But then, the world discovered the PIIGS. Bad news for Greece, Ireland, Portugal, Spain and the rest, and anyone holding their government debt - good news for the eurozone's exporters, especially the German ones.

The longer eurozone policy makers fudged and delayed, the more competitive German exporters became. At the end of May 2010, the euro was down at $1.20.

Since then, the currency has been even more closely linked to ministers' ability to keep a grip. Amazingly, it was back at $1.40 at the end of the year, as traders briefly stopped worrying about Portugal and Spain. Then it slumped again - falling again, today, on fears that ministers would not make much headway on proposals to expand the eurozone's new bailout facility - the EFSF - and/or make it more nimble in response to market shocks.

I don't think that the eurozone's finance ministers are failing to resolve the crisis on purpose. It's not as if this is an easy problem to fix. And of course, a full-blown panic over Europe's sovereign debt would do far, far more damage to Europe's financial system and its economy than a rise in the value of the euro. And this degree of volatility in exchange rates does no-one any good - exporters least of all. Still, in this "race to the bottom" among the major currencies, Europe's knack for crisis mis-management may be the strongest weapon it has left.

Comments

  • Comment number 1.

    It is not clear how a devalued Euro would help Eurozone countries fund their sovereign and domestic banking debts. The debt funding/confidence problem is far from over and failure to correct it would have far reaching effects on the recovery of most Euro zone countries. I would expect Ireland and Greece now cast into a downward economic spiral to need another bail out which could precipitate wider worries in the zone and beyond including the UK which is more cautiously following the same deflationary path.

  • Comment number 2.

    Any chance of framing your blogs with UK context in mind, I am concerned about Europe but mroe so from a "How will it effect the UK" standpoint that anything else.

    A strong Euro is good for our exports, but bad for our imports, I assume idealogically we want a weaker Sterling:Euro ratio but practically this is gonan drive yet more imported inflation?

  • Comment number 3.

    Stephanie,

    You are quite right a policy of passive devaluation will help Europe (and the UK) to ratchet up its economic activity.

    The question is of balance; too much currency devaluation and you get into a worthless currency downward spiral, too little and the currency may rise to make your exports too expensive.

    It is however inescapable that monetary policy management needs to be accompanies by a degree of fiscal regulatory coordination within Europe (and not just the Euro Zone).

    The UK needs to be a strong and well integrated part of of the EU - for our own benefit. Commentators who bad mouth the EU for ideological reasons should recognise the huge economic damage they are doing to the UK.

  • Comment number 4.


    Wow ! Ms Flanders. A thunderously cynical blog by your standards.

    Not Management by Crisis. But Management by Mismanagement...or... Wirtschaft durch Misswirtschaft.

    Ms Merkel must adore you Ma'am

    PS Was that a big black ring I saw on your finger the other day on YouTube , or a knuckle-duster ?

  • Comment number 5.

    Naturally, I am being a little facetious. But I have been struck by the number of city forecasters predicting that the euro will go up in 2011. Goldman Sachs, for example, is betting that one euro will be worth $1.50 by the end of this year.

    Back to my trusted mantra.

    Time for the UK to join the Euro.

  • Comment number 6.

    There was a relentless rise in the value of the euro against the dollar in the first years of the single currency, peaking just shy of $1.60 in the summer of 2008.
    ...................................................................


    I do seem to remember the Euro falling to US 87 cents in early days.

  • Comment number 7.

    Just another lull before another storm!

  • Comment number 8.

    @ 2. At 09:51am on 18 Jan 2011, Anand wrote:
    Any chance of framing your blogs with UK context in mind, I am concerned about Europe but mroe so from a "How will it effect the UK" standpoint that anything else.
    ------
    I fully agree. See Stephanie's description of herself, top of this page:
    "This is my blog for discussion of the UK economy, how it relates to the rest of the world, and how it affects us all"

    Stephanie, really, we have enough general anti-EU rants. Can you please stick to what you are supposed to do, and refer back to how your topics relate to the UK?
    Thx...

  • Comment number 9.

    We need to urgently debate why we are in the EU and stop allowing ourselves to be bullied by global capitalists ....who are currently using the EU to take over the old Soviet Union for the benefit of investors in Wall Street rather than us europeans.

    And before I am accused of being another moaning sceptic please accept that I have spent years debating with other europeans and know hundreds times more about the subject than the average blindfolded hoodwinked Briton.

    The EU is a complete confidence trick from our narrow British "value for money" perspective...and yet the potential is there for us to break free from American domination and create an independent-minded social democratic Europe if europeans can shake off the scourge of American capitalist meddling and asset-stripping that is currently going on here (and in the rest of Europe)....to no european`s benefit except the corrupt elites and their half brothers in organised crime.

    The trick to understanding the dynamics of Europe is NOT to think that the USA is the squeaky clean influence it portrays itself to be...or to imagine that Europe is presently independent of the USA....which is busy pulling strings and regime changing all over the continent.

    It`s Wall Street and it`s London offshoot that have been central to creating the mountain of debt and fraud that is crippling Europe ....and it`s time we had sort of wikileaks wake-up call to what is going on so that we can address it from an informed position after years of being kept in the dark.

    We could start by investigating how the likes of Blair and Mandelson expanded the EU (behind our backs) to include economies quite usuitable for inclusion in the Eurozone....and how American "bankers" helped countries like Greece and Ireland present themselves as financially able to cope with all the cash that has since then been thrown at them....which WE are now havingto pay back.

    I am sorry to say that the ´óÏó´«Ã½ has been little more than a neoliberal expansionist propoganda machine regarding Europe and issues like Kosovo and Turkey.Must try harder!

  • Comment number 10.

    @9. worcesterjim wrote:

    And before I am accused of being another moaning sceptic please accept that I have spent years debating with other europeans and know hundreds times more about the subject than the average blindfolded hoodwinked Briton.

    The EU is a complete confidence trick from our narrow British "value for money" perspective...
    ------------------------------------------------------------------------
    I think you overvalue your credentials Jim!
    The fact that less than 20% of Brits do not trust the EU is proof enough that they smell a rat and the "confidence trick" you speak of is well understood by a great deal of the European people as a whole.

    The four biggest contributors to the EU budget, France, Germany, Italy and the UK provide 62% of the total budget contributions. However, the people of those countries can only muster 34% support for the EU! They know only too well what a scam the EU is! EU support comes from the ex communist Eastern Bloc countries, simply because they receive the most! Trust me when I tell you that as soon as it's their turn to join those nations that pay, their enthusiasm will evaporate overnight!
    What you and they don't understand, is that the EU was never intended to benefit the people of the member states, it was created to control them! The propagation of pointless regulation, chaos and resultant destruction of the will to resist will hand the unelected Brussels oligachs what they have always sought to receive.
    Do you believe that dumping a million tons of dead fish back into our seas every year is just careless EU fisheries regulation? Or spreading poisonous industrial waste on our fields under the EU land fill directive is a little policy oversight? And as for the Bio-fuel madness that will require turning over the vast majority of european crop growing land to hit the EU's life threatening targets.....well, just a little calculation error which can be put right no doubt!
    Now the EU debate begins concerning direct taxation of the people of Europe. If they use the same tactics as used to force the Lisbon Treaty on an already repressed European public, the next step is very, very obvious! WHY DO YOU NEED THE EXPENSE OF NATIONAL GOVERNMENTS?

  • Comment number 11.

    10..CB ...Forgive me for overvaluing my credentials.....but console yourelf with the thought that it gave you an opening to drone on like the Daily Mail..!

    Look ...the EU is an American orchestrated disaster which the British public have been deceived into believing is run from Brussels and Germany.

    In fact it`s an extension of Wall Street`s global empire and if you don`t believe me just ask yourself why Mrs Thatcher was deposed having been such a faithful tool of America?

    Yes...she was terminally unpopular and had done the damage they wanted done .....and exported our industry to their new investments in Asia...but there was another reason ...she stupidly believed that the Americans cared a fig about us and seriously imagined they wouldn`t mind if we pulled out of the EU....and she was as wrong then as she still is now! So she had to go!

    If we ever seriously tried to leave the EU the american run media would have an instantaneous pauline conversion from scepticism to ´óÏó´«Ã½-type Blue Peter positivism towards the EU!

  • Comment number 12.

    @11. worcesterjim wrote:

    10..CB ...Forgive me for overvaluing my credentials.....but console yourelf with the thought that it gave you an opening to drone on like the Daily Mail..!
    -------------------------------------------------------------------------
    As I live in Europe, a long way from old Blighty Jim, I have little awareness of the Daily Mail. As you seem to suggest the content of this newspaper is somewhat trying, I must accept that you are obviously far more aware of it's style and content than I!
    I am heartened however, to see you are now totally in agreement with my earlier post.

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