Euro Turns and Corrects

Andamento del mercato - 19/06/2015

With negotiations down the wire and Syriza’s Alexis Tsipras busy inking deals with his Russian counterpart Vladimir Putin to build an oil pipeline stretching into mainland Europe, the market is starting to get nervous that a deal will remain elusive. The Euro rose sharply versus the dollar in the wake of the Federal Reserve decisions and in light of the European Central Bank’s monetary easing efforts coming up short of expectations. The German Bundesbank in particular is holding back on purchases of sovereign debt, hurting the ECB’s efforts to drive down longer-term borrowing rates while expanding the monetary base to improve lending and keep the Euro week. After announcing front-loading of bond purchases, asset purchases have so far been unable to meet the EUR 60 billion target set by the ECB. The crisis of confidence in the Euro comes at a time when it is most necessary to bolster assurances to outside investors at a critical juncture in the Union’s history. A Greek exit could complicate those efforts.

Although weakness in the Euro will temporarily benefit the Euro Area economy in aggregate, it should only be viewed as a temporary boost to exports and growth as the real problems remain unaddressed. Debt levels in European sovereigns have continued to rise despite austerity in another growing sign that the measures are effectively killing growth potential instead of bolstering output. Mario Draghi’s insistence that regional governments focus on fiscal stimulus has largely fallen on deaf ears, meaning he is the only real driver of progress. However, monetary policy unaccompanied by strong fiscal policies has typically fallen short in every other historical scenario. Without the needed economic reforms, it is irrelevant whether Greece stays in the Union because the Euro Area will have bigger problems ahead with growing momentum amongst anti-austerity political parties. The longer the Greek drama drags out, the more ammunition it affords the anti-euro and anti-establishment fringes of politics.


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