The more things change, the more they stay the same, at least in the EMU horror story as governments tumble, contagion and bank-run fears cross the atlantic, and investor greed gives way to fear on anything remotely linked to the fate of the single currency. Spain’s socialist government’s fall today (most likely), will make for the fourth change of guard within the eurozone’s most suffering economies. And while Portugal and Spain at least granted ballot-box exits to their leftists, Greece and Italy have had technocrats installed by financial institutions themselves run by political appointees, bolstering the charge that the monetary crisis has not only assumed a distinctly political outlook, it has also begun compromising the union’s democracy.
For the wicked, tactical euro-longs each time banker boys (Lucas & Monti) reassure patrons with austerity talk are sure short-term winners. But for the more sensible, strategic prudence should still dictate selling on the euro upside, as opposed to buying the downside. Despite the brief risk-return towards last week’s end, it does not surprise me that the euro has dropped three consecutive weeks against the dollar, down six per cent to 1.3525. Also, with the ESFS support system proving increasingly unviable, watch for eventual market rejection of the austerity argument to blow yet another hole in the Merkel-Serkozy desperation to safeguard big banks, even at the cost of a long and deep recession. The euro can sink to 1.30 a lot sooner than the six-month window my crystal ball gave it a couple of months ago. The decision to remove Papandreou and Berlusconi, especially after they pushed through austerity measures their successors would enforce, makes me think I’m living in a surreal, dream world.
Why ditch them just when they fell in line? And why make cabinet approval for fiscal cuts a precondition for resignation? How does it make sense that they must leave for doing what they were told? How will Rome and Athens now posture in the drama, other then squeezing the middle and lower income groups? Who decides who presides over defaulting governments? If austerity is the main theme, why don’t Merkel, Sarkozy, Draghi and Co explain how hardcore austerity won’t further stagnate economies and increase deficits? When public austerity is not accompanied by rapid devaluation, downtrends are only exacerbated.
Surprise surprise, the single currency does not allow such a contingency. And with Italian, Spanish and even French yields climbing to unprecedented levels despite large ECB purchases of peripheral debt, coupled with bank losses compromising French liquidity, there is little life left in the euro. That policy makers still publicly support the euro narrative betrays something devious at play in Europe’s nerve centres. Something that cannot, must not be allowed to reach the market. At least not now.
My gut tells me that protecting Europe’s banks instead of its people, forcing puppet bankers to lead governments, trumpeting austerity even as millions protest and thousands are arrested shows the troika has realised its days are numbered. And its heads would rather spend them making as much targeted gains as possible, instead of fretting over people’s fortunes as their return to power is practically ruled out. Europe’s disappointment has started feeding into emerging market growth as well. Kiwi and rand are down 3.7 and 3.2 per cent respectively, Brazilian and Indian indices are down, their industrial production weakening. Korea’s industry has barely breathed all year. Since they are export-dependant, further slowdown in the economic north will continue to compromise growth in higher-yielding emerging economies that were once the cornerstone of integrated, international bottoming out. Risk hopping onto commodity currencies only when brief windows of risk present themselves.
Cable is just as uncertain, being pulled by divergent forces as weak growth and hints of more QE dent sterling’s safe-haven appeal. For any sanity to return to currency markets, the euro debate must reach a conclusion. Either the troika’s been holding aces very close to the chest, or the single currency’s death rattle is just around the corner. There will be no middle way. My bet? Adieu Mr Euro!
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