L'Information est d'Or

During the recent negotiations between Greece and its creditors about a debt restructuring programme, we learned that both parties were very keen on maintaining the Eurozone intact (aka Greece staying in the Eurozone). Why is it in their interests to do so? Let's see both sides arguments. First the Greek argument. The Greeks are going through incredibly harsh times with sky-high unemployment and plummeting income, so it's fair to wonder why they are so keen on staying in the Eurozone. What is so great about the Euro that a country is ready to face the threat of economic collapse to stay in it? Indeed what is happening in Greece now, with all banks being closed, capital controls and cash redrawal close to impossible, is a financial collapse similar to the one the U.S. had feared after Lehman Brothers  bankruptcy. With no lending, an economy cannot function properly, companies face liquidity crisis leading to being shut down, people don't invest or rather emigrate and the...

Back in August 2008, I advised my readers in a post ( Buy USD vs EUR ) of a likely decline of the Euro against the US Dollar because of worsening situation of Europe compared to the United States. And indeed, three years and a half later, the Euro has declined from 1.5 dollars to 1.35 (-10%). What about now? As Euro area is just entering the second leg of a double-dip recession - IMF forecasts -0.5% GDP growth in 2012 compared to +1.8% for the USA. (didn't we also warn you about it? see the post of July 2010 -   Double Dip  ), a further decline of the Euro wouldn't be surprising... EURUSD exchange rate (Google Finance)

Willem Buiter of the Financial Times seems to beleive so in the following article: Time for the ECB to get serious about the overvalued Euro Also an interesting question is should the ECB intervene on the FX market? What's sure is that no other Central Bank has any incentive to devalue the Euro.

After seven years of decrease during which the US Dollar lost 40% of its value against the Euro, it is now time to reverse the trade and buy EUR vs USD. Euro zone has fallen into serious recession while the US, though close to recession as well, have much more capacity to rebound quicker. GDP growth forcecasts (Source JPMorgan) 2008 2009 United States 1.5% 2.0% Euro area 1.2% 0.4%

Send to a Friend Print Article View as PDF Permissions/Reprints Thoughts from the Frontline Weekly Newsletter In this issue: The Problem with the Euro The Euro at Par with the Dollar The Euro at Par with the Dollar About five years ago, I said that the euro, which was trading at about $.88 at the time would rise to $1.50 and then fall back to $1 over the course of a decade or more. It would be one huge round trip. By the way, giving credit where credit is due, that opinion was crystallized over a long dinner with bond expert Lord Alex Bridport and several companions in Geneva. The logic was compelling then and it still is now. We are halfway through that decade long trip and it remains to be seen if we get back to parity. I think we will. Why would the euro fall? Because the currency is still an experiment in cooperation. At some point, one or more of the weaker European countries is going to need more monetary stimulation than the majority of the countries in the union, for a var...