Forecast: euro exchange rate will continue to drop?

Forecast of the euro remains ambiguous and grim

In brief: The exchange rate euro can not be stable in 2010, but the Europeans firmly believes in the stabilization of the financial sector in the region, and therefore believe in the stabilization of the currency.

The exchange rate euro is the main problem for Europe, in order to solve the problem of stabilizing the exchange rate of uniform European currency, officials have sweating. Is it possible collapse of the euro area? Until recently, I would say: of course not. And not because I think monetary union brilliant idea. To me he always seemed a risky project, especially after it was decided to take his country, quite unlike the founders of the north. It seems that the main forces of Europe set itself the task by all means get it to work. And now they, too, to this endeavor?

Do not know. In Europe generally accepted that the crisis is financial. Marco Annunziata of UniCredit makes the following conclusion: “In retrospect, we see that the shortcomings in the institutional framework for the euro zone were very serious and at the same time extremely simple. First, monetary union can not operate without the necessary convergence or integration of the tax-credit policies countries. Second, the euro failed to find incentives for compliance with budgetary rules. ” The graph Annunziata shows that banal view is wrong. Suffice it to recall how often violated a requirement to prevent the growth of the budget deficit above 3% of gross domestic product. Yes, Greece badly behaved. But Italy, France and Germany violated the rules are much more active than Ireland and Spain. Nevertheless, it is the latter now face enormous financial difficulties.

The budgetary requirements do not take into account the risks. This is not surprising. Bubbles in asset prices and their associated costs have advanced the Spanish and Irish economies. And then the bubble burst, leaving the ruins of the budget. So the whole thing in a bubble? Now it becomes clear that the creation of the Eurozone’s party has a duration of one generation. In some countries were enormous asset bubbles, in other rapidly growing relative wages. Meanwhile, Germany and the Netherlands running a huge current account surpluses. Monetary Union has encouraged the flow of capital to developing countries on favorable terms. However, private spending soared and budget deficits. What have we come? The reaction of politicians in the Eurozone crisis was predictable: blame the speculators to finance shaky public debtors (and thus save the lenders), to restructure the debt and demanding stricter fiscal rules for countries with large deficits. The European Central Bank to invest? 16 billion in risky government bonds euro area – although it is a small sum by the standards of recent interventions, but the important message. The euro fell, but still remains at a high level compared to previous values. At best, the euro area gained a little time to adjust. What’s next? Most likely, Greece, at some point restructure its debt. And that’s not the worst of scenarios. When the bonds of the country’s status will junk, “about a good reputation can be forgotten. Under these conditions, the advantage of a lighter debt burden for credit enhancement compensates for the price of default. Hence, logically the question of when will be fixed primary deficit budget (before interest). Supposedly, in 2012 in spite of everything, peripheral EU countries will not be able to return financial stability, restore growth. For countries with large current account deficits, this growth must be achieved at the expense of net exports. The alternative – the restoration of private spending and a steady flow of capital – is unlikely and undesirable. The question is whether these countries have lost competitiveness in the time of entry into the Eurozone, to achieve a structural rather than cyclical, growth of net exports. As experience shows, those emerging from the debt crisis, almost always came out of the situation by devaluation (see chart). Peripheral countries for the most part are trading with each other. Therefore, a slight decrease in the external value of the euro will not help them. Way out for the monetary union may be a reduction in prices. The closest to that Ireland and other countries heavily from her behind. But it is a long process, everything else increases the real value of debt. Proponents of structural reforms do not take into account these facts.

What does it mean?

First, doubts about the possibility of solving the budgetary difficulties are well founded. A high probability of debt restructuring, especially for Greece. But it will not increase the country’s competitiveness. Secondly, the euro area has won some time. It must achieve solvency of its financial system and be able to survive the wave of restructuring of private and public debts. Third, analyzing the complexity of the euro area, people do not notice the instability of the private sector. Somewhere he has accumulated too much, but somewhere – too spent, given, or borrowed. He strongly destabilize the situation, compounded by the total of all monetary policy. Fourthly, despite the fact that the peripheral countries twists, like a fish on the hook, the fisherman is not going to let go. Underlying all the arguments about the reform and policy of the eurozone is a proposal on the regulation of fiscal policies of countries. Indeed, Annunziata asserts that “the budgetary limits should be included in the legislation of each country and constitute a binding and immutable rule.” These rules apply in the states of America. But in the U.S., in addition, there is also the federal budget. In the euro area it is not. Second largest economy in the world is close to the adoption dokeynsianskih fiscal tradition. Fifthly, the relationship between Germany, according to budgetary constraints, and countries that oppose such rules (especially France), or unable to adhere to them, remain strained. Given the scale of the adjustments, there is no certainty that the euro area will cope with all the difficulties. Patience Germans may break. And, finally, the EU is moving to tighten the budget, which at least temporarily offset the weakening of the exchange rate. Americans believe that such policies only hurts the neighbors and can not provide a global balance of forces. It is unclear how far he postpone the global recovery. But it does not help. Despite the gloomy mood, the euro area is likely to survive. But wrong to think that one respect only budget rules – a key to success. Irresponsibility of the private sector – from the main problem. All attention is now again directed to the tightening of budgetary management. On success should resume growth. But whether it can occur in conditions of austerity, as expected by some? Doubtful. In shirt sleeves in the winter do not resemble.

Ukrainian Globalist
2010-05-22 22:30, Economics.

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