The present malaise wasn't the prevailing situation over the past decade. Ever since its creation in 1999, the euro has primarily been on an appreciation trend that has astounded most observers. At its inception, it was worth approximately $0.85 and many proponents of the new currency arrangement were forecasting parity with the greenback as a noble objective. The euro actually leapt past the dollar in its early days and reached a high of $1.61 in July 2008 before the onset of the "Great Recession." It soon fell and recovered until the latter part of 2009 when leaks began appearing in the press that there were serious debt and deficit issues arising in Greece.
Currencies typically reflect the health of a nation's economy.
The prevailing trend for the period is unmistakable, decidedly downward depreciation for the value of the euro versus the U.S. dollar. Changes in out financial markets, however, never move in a straight line. Fear moves the market down and positive actions tend to raise expectations that, if not met, can produce the "rollercoaster ride" effect.
The crisis in Europe has been with us for more than 30 months, and, as Chancellor Angela Merkel of Germany has often said in public addresses, the problems and their resolutions will take many years to take full effect. Political action must take place in 17 separate governments, a challenge that makes our deadlocked Congress look like child's play.
When the full details of the Greek problems were revealed in May 2010, the word "crisis" soon became the most repeated word in financial headlines across the globe. Although Greece was small in the scheme of things, the fear was one of "contagion," the uncontrolled spread of the same issues to other weak member states. Portugal and Ireland also received bailouts but the concern was heightened when Spain and Italy, the other components of the "PIIGS" sub-grouping, soon began to voice similar problems with their respective economies. As a result, Europe slipped once again into recession by the end of 2011.
During 2011, bailout programs and emergency funding measures were approved but funds also came with austerity demands on impacted countries. Public protests to proposed draconian measures led to violence in the streets. Prime ministers in both Greece and Italy stepped down prior to the end of 2011 and 2012 was greeted with the potential for a Greek default on its sovereign debt payments in March. Downgrades by the rating agencies on many banks and on national credit ratings also made raising funds in the capital markets more expensive and difficult.
As it stands, Germany and France, by only a slim margin, are the only two economies in the eurozone that haven't slipped back into recession. Weaker countries have had to issue more debt to keep operating on a daily basis, hoping that gross domestic product growth will occur and create the prosperity necessary to run their governments and pay down debt. The market, however, objects to issuing more debt by increasing their costs. Growth, accompanied by prudent fiscal management, is the only acceptable solution in the long run from the market's perspective.
What is the fundamental problem with the present euro arrangement? The euro currency is an amalgam of the currency values that existed in the past. Germany has benefited enormously since its exports are driven by the value of the euro, which is easily 40 percent cheaper than the old deutschmark would have been. For the "PIIGS," however, the euro is much stronger than their old currencies would have been and tourism to these countries has suffered as a result. The euro treaty doesn't allow for profit sharing and any proposals have been met with stiff resistance from Germany.
Weak countries are then left with few options -- grow, make significant cutbacks in fiscal spending or issue more debt, a continuing "death spiral" of sorts. The market response has been to increase interest rates to unsustainable levels on new debt issues, a type of "forced" financial roadblock. In 2012, government officials did move to prevent a complete Greek default on its maturing debt issues but rising interest rates make paybacks near impossible. Widening rate spreads in Spanish bond auctions account for a portion of the recent declines in the euro's value. Delays in Greece to form a representative government accounts for the balance, although recent elections have been favorable.
Experts agree that a Greek exit from the euro would cause more problems for the global economy. Exports to Europe are already in decline, a cause for concern for all external economies. A weaker euro might actually help but central banks around the world are loath to let their euro reserves devalue. In the meantime, government officials continue to discuss growth initiatives but the market wants decisive action, not empty promises. Only time will tell.
(Tom Cleveland is a market analyst for Forex Traders with over 30 years of experience in the international payments industry. www.forextraders.com)
(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)
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