There’s been a lot of talk lately about the value of the Euro. Much of it speculates that the Greek crisis will undermine the Euro, but what is the real situation?
Sarasin have produced an interesting Forex Analysis (pdf, 292kb) which focusses on just this issue. They also have some predictions about which way the main currencies might move over the next year, but obviously there are no guarantees. Still, it might answer a few questions for you.
My personal view is that the Greek tragedy will not be a major threat to Euro values because the size of the Greek economy is just so small – less than 3% of the whole Euroland zone. Yes, it is a test of the resolve and rules behind the Euro, and there may be many people wishing to profit from talking the Euro down.
Many pundits have suggested that Germany should bail Greece out. They’d love that in the currency markets of course. Do you remember Chancellor Lamont trying to prop up the value of the pound so as to maintain it around a fixed exchange rate to the Deutschmark back in the 90s? His actions only served to feed the profits of the City, even though he lifted interest rates to 15% on one day in an attempt to combat the wall of money shorting Sterling.
With Greece being such a small fish, I believe it could be being used as bait to tempt the bigger fish such as Germany into making a similar mistake. On its own the currency markets probably have little interest or potential profit for those speculating on Greek debt, but if Germany got financially involved the markets would lick their lips greedily and pile in.
German Chancellor Angela Merkel has said Greece does not need financial aid after talks with Prime Minister George Papandreou in Berlin. She has promised to help modernise Greece though. Financial aid would be politically difficult for Merkel to give at the moment, as most Germans oppose giving aid to a country that has misreported budget figures for years to hide its mountain of debt. She must be cursing her CDU predecessor, Helmut Kohl, for his rush to drag in as many countries into the Eurozone as quickly as possible – including those which had to massage their figures to qualify.
Having said that, who was overseeing the Greek compliance with Eurozone rules since they joined the Euro? The Wall Street Journal reports that:
…an examination of budget reports to the EU shows Greece hasn’t met the deficit rule in any year except 2006. It has never been within 30 percentage points of the debt ceiling.
Greece has revised its deficit figures, always upward, every year since 1997—often considerably. Several times, the final figure was quadruple what was first reported. Late last year, the Greek government set in motion its current crisis by increasing its 2009 budget-deficit estimate, initially 3.7% of GDP, to nearly 13% of GDP.
That is where perhaps Germany can help a lot towards modernising Greece: improving the country’s financial housekeeping, improving tax collections, becoming less spendthrift and admitting to reality. But as Alex Salmon says in his Reuters blog
…while the ouzo crisis might be waning, I’m sure that we’ll see more, similar, crises in future. Because southern Europeans can’t become Germans just by signing a treaty in Holland.
So, will this badly affect the Euro? When measuring currencies a comparison often looks good or bad depending on what it is compared with. During the Bush years for instance, a comparison with the USD always favoured the Euro due to the financial largesse encouraged by that Republican Administration. With a double helix of spiralling Trade and Budget deficits, the USD has been soft for some time, and in danger of falling further unless nothing changed. But things have changed: new administration, credit crisis, high US unemployment (currently 9.7%) all concentrating people’s minds on diverting money from spending to reducing debt. On top of that, Obama’s “line by line” budget reviews perhaps the value of the USD will stabilise. The jury’s still out on the USD though, as the elephant in that room is the Healthcare Bill.
My feelings are that the steady increase in the strength of the Euro will slow, if not stop altogether bringing some stability back. The USD may even gain back some of its losses. But what really will happen depends on many factors we still don’t know the outcomes to. Whatever happens though, you can be sure the Swiss National Bank will be trying hard to maintain as steady an exchange rate between the Swiss Franc and the Euro as they can, as Europe is such a big economic partner for our Swiss home.