Since Japan intervened in the currency market last month, and Bernanke has been keeping dollar low with whispers alone of ‘further Fed. actions’, euro has strengthened against both dollar and yen by nearly 7-10%.
Unfortunately euro does not look like a well protected child of the ECB or the euro zone because of its strength, it rather looks like an orphan due to its relative strength in the ongoing currency war where the race is to the bottom. China’s yuan, due to its automatic linkage with dollar, naturally weakened against the euro.
Surprisngly the ECB or the EU has shown least concern about this strong euroÂ and its sharp upward volatility. It will be actually wrong to term euro ‘strong’, it will be more accurate to say that euro at this moment looks less weak than dollar (due to fundamental reasons + possibilities of further Fed. easing) or yen (due to possibilities of further intervention).
However the ECB, and the EU have its own problem child. Although these are indeed ‘children’ compared to the size of the overall EU GDP (barring Spain from the list of Portugal, Ireland, Greece and Spain in PIGS), it makes the job of avoiding a restructuring of the national debts or even default ofÂ any of the weaker economiesÂ within the European Union a more difficult job.
A stronger euro in turn makes the recovery process of Ireland, Greece, Portugal and Spain even more difficult.
But not necessarily to Germany (or France). The pain felt by Germany or France is insignificant compared to the pain felt by the PIGS.
It is simply because the export-driven Germany economy relies a lot on export markets within the euro areas. Its import costs come down due to stronger euro, and export competitiveness to the euro area is simultaneously not lost as realization remains in euro. Therefore a fluctuating euro, stronger or weaker, does not affect the export-driven Germany economy when it comes to exports within EU itself.
Germany happens to be the winner in ‘heads you lose and tails I win story’ of the euro and the EU.
Problem is with the rest of the problem children. None of these smaller economies areÂ export-driven, however whatever export they do to the rest of the world gets affected due to a strong euro. Also these weaker economies’ exports are not primarily within the EU, unlike the case of Germany.
So at a time of austerity and job losses in these economies, they further lose their export-related competitiveness and jobs.
Then why is the ECB silent on a strong euro? Why isn’t there any scope of intervention or even an approach to ‘talk the euro down’ from Trichet or the ECB, as followed by Bernanke or the Fed.
It is because the growth engine of Europe is not feeling the pinch of a strong euro. And Germany has a much larger say on activities within the ECB. It also helps Germany to improve its negotiation power over the weaker links of the EU when it comes to austerity.
Question is: can it sustain? With dollar looking weak and further weakened by actions or words of the Fed., yen weakend by actions of BOJ; what recourses do the weaker economies within the EU have, other than asking for more bail-out funds from the ECB? Their internal actions alone can’t bail them out, but can only weaken the economy further as itÂ has now beenÂ witnessed with negative GDP growths.
It’s said that ordinary people like usÂ should notÂ share the dancing floor with the elephants. Today there’s a ‘currency war dancing floor’ race to the bottom amongst the giants of the global economies like the US, Japan and China; the top three in global economic order.
The result is a strong euro, and strong local currencies among various other emerging nations.
The weaker European nations are not dancing with the elephants, however by linking themselves with another elephant called Germany who isn’t sharing the dancing floor with the rest three but having its own party instead; the weaker European nations have beenÂ suffering silently, by paying a very costly price for a strong euro.
The strong euro along with the austerity measures of the ECB may be stampeding the weaker EU economies, however the giants within the EU like Germany (and France) or elsewhere like the US, Japan or China do not feel it.
Many other nations across the world feel the same as the PIGS in Europe feel. However if need be, these nations have the option of intervention (for export-surplus nations like South Korea) or a devaluation (for current account deficit nations like India). The PIGS don’t even have that option. They have perfectly been sandwiched between two groups of dancing giants – in one side there’s the race to the bottom in this currency war with the likes of US, Japan and China; and on the other sideÂ there isÂ Germany (and France).
PIGSÂ can only suffer silently and pray that the elephants do indeed stop their mad dancing in a race to the bottom of currency valuation.
It is time the broader world of the PIGS remind these elephants that there’s accountability in monetary policies for a nation enjoying the status of a global currency. One can’t act like a third worldÂ nation in managing its currencyÂ when one’s currency is held as reserves in trillions by other nations, many of which are poor nations,Â at the cost ofÂ depriving the legitimate needs of their citizens.
Problem is: who would deliver this SOS Â message to the dancing elephants?Â IMF excelled in this job when it came to the third world nations; however knowing by the track-record of IMF, one can reasonably say that IMF actually is a pawn in the hands of the elephants than having an independent mind of its own.
So the PIGS are likely to suffer until the dancing of the elephants in theÂ ‘race to the bottom’Â war in currency valuation finds a clear winner or an acceptable treaty.
Both are unlikely in the near future.