Now….. this is one of those times when I try and look at what is real about a topic, try to apply some logic to understand the reasons why, and then overlay some analysis/judgement of my own to the case in point, and today that focus is on the euro. From where I sit, everything I hear of, everything I analyse, everything I read, screams caution (at least!) and yet, short term, the euro continues to bounces back – OK, against a still weak dollar, amongst others – to levels that could very easily be argued as being non representative of what are obviously major macro problems facing the area.
I understand the major drivers of euro strength: continuing investment purchases by desperate equity fund managers – desperate to try and find reputable stock markets where non record levels are not at a `buy caution`level; continued diversification by sovereign nations away from dollar dominated reserve currency portfolios; the presumed statutory inability of the ECB to conduct quantitative easing, and an over-riding presumption that the political will behind the sanctity of the project will serve to overcome ALL `relatively minor` problems that threaten its future. All these continue to prompt demand for the euro, but I do from time to time, question how long this can last?
I was watching with interest over the weekend to hear about what was going to emerge from the latest ecofin meeting ahead of the stress testing of banks in the eurozone. As I occasionally bleat on about, but have no problem with re-iterating, this issue is going to be very important over the coming months. Without going into the detail, ecofin are basically trying to agree on a mechanism for agreeing about who pays for re-capitalisation of banks that fail the tests. The traditional eurozone paymaster is having trouble at the moment trying to cobble together a coalition, and you bet that the future role of Germany in the eurozone with regard to its obligation to the Club Med countries is in the forefront of any discussion! At the heart of this debate is the truism that the German electorate are simply not prepared to write a blank cheque to right other countries past (?) profligacy.
If precedent is any clue to the outcome of these continued talks, then a fudge of some sort will be reached – it always has in the past, but the most important, and potentially damaging item to look out for will be any watering down of the stress test requirements – in order to reverse-engineer the need for bail outs. That would be another very negative blow to an increasingly concerning currency bloc.
There are other concerns of course, many well documented, but the issue of a SRM (Single Resolution Method) for dealing with banks that fail the stress tests will be the most immediate major issue that has to be confronted. Its outcome will certainly be watched closely as a leading indicator of strains that appear to me to be increasingly waring.
