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The problems of the Eurozone

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Home Page > Finance > Currency Trading > The problems of the Eurozone

The problems of the Eurozone

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Posted: Dec 08, 2010 |Comments: 0
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We have begun to see the Eurozone split itself silently into very much a two tiered state. Some economies (Germany and France stand out) remain strong in these difficult times – German Industrial Production figures today are evident of this, whilst others struggle to keep their head above water as fears of contagion continue to grow. The PIIGS of Europe have continued to suffer throughout 2010 and finally the issue seems to have come to a head with the bailout of Ireland causing a huge scare factor regarding the overall fate of the single currency.

Notably these views are not new and have been aired for some time with popular opinion extremely concerned over such a large zone with so many, very different economies sharing a single fiscal policy. It is a point well made – how anyone could attempt to manage the German and French economies along with the Greek and the Irish certainly seems to me an uphill task. This in itself limits the ECB’s power compared to the BofE or the FED and it is no wonder they can do little to prevent the PIIGS ‘going to the wall’. In both cases (of Greece and Ireland) the ECB have had to use a last resort bailout and have been unable to actually prevent the necessary handout.

It is deeply worrying then that Spain, Portugal and Italy, are in a similar position as the Irish were only a few months ago. Whilst the International Monetary Fund have a sizeable pot (of around 87 billion Euros) from which to drawn on to help their falling brothers, it is not substantial enough if countries continue to come crawling to Brussels with their hands out. The Spanish economy in particular is large enough to seriously throw the Euro into disarray, hence questions regarding the survival being partially warranted, at least.

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It is not simply this that has dented the Euro, although obviously it has played a large part. Angela Merkel (the Chancellor of Germany) has this week voiced her own concerns regarding the Euro and this has led to the idea that Germany may in fact, pull out of the Euro. Merkel has rejected a plan of having shared ‘E-bonds’ in a statement that very much echoes ‘you run your country and I will run mine’. As is the law of nature the stronger economies in the Eurozone are trying to distant themselves from the other’s weakness, whilst the PIIGS cling to the other’s strength.

What is for certain is that the continuing difficulty of managing the Eurozone with a motto of ‘one fiscal policy fits all’ will prove difficult at best and I’m sure it’s effectiveness will be severely limited. It is possible that the ECB will begin to look at different policies for different economies within the zone by actively addressing the segregation that we are beginning to see and using different measures to help very different economies grow.

Whether Spain or Portugal are under serious imminent threat (although they are not if you listen to the musings of their leaders – mind you so were Ireland and Greece) is a fairly moot point – the Euro is heading in the wrong direction with or without further collapse. The Euro will struggle through to Christmas and the first quarter of 2011 as the ECB struggle with the various difficulties faced by the Single Currency and I would expect the Euro to lose ground against Sterling, the US Dollar and the Japanese Yen.

As for predictions I would not be surprised to see 1.20 rates on EUR / USD by the end of March next year and for GBP / EUR to climb to levels past 1.25 (which we haven’t seen since the very end of 2008). If you do have your funds tied up in Euros and are looking at transferring elsewhere, whilst we may have lost ground in the last month or so against the majority of currencies it may be a serious case to cut your losses and move on.

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James Matthews
About the Author:

I am an Executive Dealer working for Award Winning Currency Brokerage Foreign Currency Direct. For the best rates on your money transfer contact me on FREEPHONE 0800 328 5884, email me at jfm@currencies.co.uk, or follow me on twitter – @FindCurrency.

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