Fall of the Euro

In recent months the Euro has weakened to twelve year lows in the face of QE announced by the ECB back in January. Further exacerbated by strong data coming out of the US indicating the potential for at least one rate hike from the FOMC by September. The Euro briefly fell to below $1.05 in trading on Wednesday 11th March. Unsurprisingly the Euro is continuing to weaken against the Pound as well, exceeding €1.4:£1, a move of nearly 20% in the last twelve months.

As Mario Draghi and others at the ECB repeatedly state, the Euro is not a policy target of theirs. However, it is an important factor to their decisions and its recent weakness will certainly help to boost the competitiveness of Eurozone exports. This in turn will provide a boost to the lagging economies in the Eurozone. A sharp devaluation is often viewed as a silver bullet for the economy and in any talks of a ‘Grexit’ the ability to have a much weaker currency is one of the main attractions. There will certainly be a lot of Brits finding their Pounds can get them a lot more on their European Summer holidays.

However a weak currency is not all positive. Oil prices have nearly halved in the last year, but as it is priced in dollars and the Euro has fallen by 24% in the same period, Europe is only seeing half the price fall. Other commodities such as Copper, which have fallen by 13% in the last year, are now actually more expensive within Europe. Also, a majority of trade for Eurozone countries is with the Eurozone, meaning the weaker currency is having a limited impact.

A weakening Euro and QE may also be covering up bigger problems in Europe. Analysts are beginning to call for large scale structural reform within Europe. Failure to use QE productively could see Europe remain in this malaise for much longer than what is nearing a decade so far. Notoriously strict labour laws making it harder for companies to hire and fire people result in a rigid economy and Greece in particular could do with tax reform, as some politicians describe avoiding paying taxes as a national sport in Greece. Perhaps some parts of Europe can look at what Britain went through in the 80s and avoid the ‘lost decades’ seen in Japan.

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Reuters: Business News