For my part, I’d say the leaders of the Eurozone have pretty good reason to feel okay about how 2012 has gone. After all, they overcame the biggest challenge facing the currency union, that of doubts about its continued survival, while making big progress on a banking union, and keeping all its members on-board.
I don’t think we should under-estimate just what an accomplishment this is. Back in July, when all you could read about were the inevitable Greek exit, Spanish bankruptcy, or wholesale Eurozone collapse, I moved quite a bit of my savings out of my Spanish account (I’m based in Madrid) to the UK, I was that concerned.
For us to look at where we stand now and say, well, Greece looks more or less secure, Spain is on steadier ground, internationally at least, and the whole dang euro project is still going, well, it’s no small potatoes, to be sure. If I were Herman van Rumpuy, I’m not sure I’d feel satisfied, but I’d sure be breathing a sigh of relief.
Not surprisingly, these dramas played out in the euro exchange rate too. If we look at the pound to euro for instance, it started the year at 1.20, climbing as high as 1.28 in July, when the crisis as at fever pitch. I remember thinking then, ‘Well, the rate’s great, but there’s a risk of the euro breaking up! What a double-edged sword.’
Now, the crisis has abated, that’s reflected in a sturdier euro again, with the pound at 1.23 against the common currency. Meanwhile, it’s been a similar swing with the US dollar, gaining nine cents against the euro at the worst of it all, before losing those gains now. For the euro then, that leaves us just as we were 12 months ago.
But of course, that was the past, when at this time of year all we’re doing is looking toward the future. So what’ll 2013 bring for the euro?
Well, as you might expect, how the euro performs depends an awful lot on how the Eurozone performs. So for instance, are we set to see the currency union going through the same existential crises it did in 2012? I don’t think so, which is one reason to suspect the euro won’t fall as low as it did this year.
But, as you know, just because the patient isn’t about to keel over and die, doesn’t mean it’s fit as a fiddle. For instance, Greece will likely need its debts cut again, which at this point can only mean other Eurozone countries taking losses on their loans. Up until now that’s been politically anathema, since it points to a transfer union.
For Spain, the chief political question will be whether Mariano Rajoy requests a bailout. Until now, he’s quite miraculously been able to avoid this, but with €230bn in bonds to be issued next year, and most of the regions shut out of the markets, there’s no guarantee this will last. Meanwhile, in Italy, the threat of Silvio Berlusconi’s return to the stage could destabilise the euro too.
Above all, probably the biggest threat facing the euro next year will be the people’s tolerance of austerity. In some countries, this is actually showing signs of working. Spain’s exports jumped almost 20.0% between 2008 and 2011, for instance. Yet this has been overshadowed by rising unemployment, falling living standards, and increasingly violent protests.
So, there is lots of potential for the euro to fall next year.
However, for all that, I find myself a Eurozone bull for 2013. I’d like to think that, for all the suffering these austerity reforms have inflicted, they’ll begin to bear fruit in earnest next year, putting Spain and other countries back on the road to prosperity. If that plays out, then maybe we won’t be looking at how much the euro falls next year, but how much it gains.
What do you think? Is the worst of the Eurozone crisis behind us? Will the euro gain next year? Let us know your thoughts in the comments.
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Interesting article with a different perspective. It is certainly the case that the Euro now seems secure [existentially] for a while longer, indeed it seems that the continuation of existing policies could ensure its indefinite survival. The only fly in the ointment is the burgeoning numbers of unemployed, specially amongst younger people, but by no means exclusively the young unfortunately) and the hardships they are enduring in places like Greece and Spain. The macro-economic policies of those running the Euro in Brussels (and Berlin, from where the shots are being called) may be called ‘successful’, but they will mean nothing if civil unrest, or worse, continues to occur in those countries most badly-affected. Either the governments in those countries must apply the guidelines laid down by Brussels/Berlin (and risk further unrest at home as more people are forced onto the streets and reliance on soup–kitchens) or they must abandon the ‘dream’, decouple from the Euro (with the consequent davaluation)and allow their economies to regenerate themselves naturally. The people running Euro policy should be forced to spend a few days on the streets in Athens or Madrid, relying on handouts themselves, rather than being insulated by Euro-taxpayer funded salaries whilst pursuing their political dreams in defiance of economic reality.
Hi Bill,
I quite agree with you that Eurozone policymakers should be forced to live ‘in the shoes’ of people who’re being affecting by these cuts. At the least, they should be forced to tour Athens or Madrid. I’m sure it’d influence the policy direction in the Eurozone.
Yours kindly,
Peter
The suffering inflicted by the self-selected elites, determined to pursue this crazed project to the bitter end, has barely begun. For countries like Spain and Greece, the initial semblance of prosperity was the result of the equivalent of an individual taking out six credit cards and maxing the lot with no thought of the consequences. Neither country is rich enough to sustain the standard of living to which their uncompetitive workforce has become accustomed. Countries that retain control of their currencies maintain competitiveness through devaluation, as indicated by the fall in the pound against the euro. Mortgages and other bills in pounds devalue in step. The only option for the Spanish is to accept much lower incomes in euros, a move that may not prove popular. What the last year has actually proved is that the idiots who devised the euro are happy to inflict unlimited structural damage as they kick the can down the road. No matter how much fiat scrip they produce, the bills will have to be paid by someone, someday.
Hi Iain,
I agree that the idea of ‘stay in the euro at all costs’ is probably a bad policy. But I’m not sure leaving the euro and devaluating is a solution. After all, the UK has failed to rebalance its economy to date, in spite of having the pound, and in fact the cost of imports rises as sterling falls. Meanwhile, whatever you might say about the euro, there’s a clear advantage in belonging to a big political bloc like the Eurozone, rather than risk being isolated, as the UK is doing.
Yours kindly,
Peter
There’s no painless way of recovering from incompetent governance, including the “thirteen wasted years of Labour misrule,” as Harold Wilson didn’t quite say, that Britain has just endured, but hitching your currency to something relevant to your domestic economy, be it Argentine dollar parity, gold, or the euro, is needlessly masochistic. Size alone didn’t save the dinosaurs and the “advantage in belonging to a big political bloc like the Eurozone” is not necessarily “clear.” It rather depends upon what the bloc stands for. Most members of Comecon, for example, did far better once they took the “risk of becoming isolated.”