The euro ended 2010 with panic subsiding about a break-up of the 11-year-old currency region, but it still faces stiff tests in 2011 over the long-term viability of the EU dream of breaking down economic barriers and creating a rival to the dollar.
Fibs about Greece’s budget, surprise bank losses that drove Ireland to seek IMF help and paranoia that Spain will be left holding the bag for billions of euros worth of bust real-estate loans all conspired to send the euro about 10 per cent down against its US rival in 2010.
Mansoor Mohi-uddin, the Singapore-based chief currency strategist for UBS, predicts a year of “super-volatility” in currencies and a surge for the euro if the crisis drives a deeper integration than the EU’s fathers ever thought possible.
“If the European Union was able to solve the debt crisis, the euro would likely experience a major rally towards 1.50 against the dollar,” Mohi-uddin writes. “The eurozone could implement a fiscal union, whereby transfers from the wealthier countries would permanently bail out the peripheral countries.”
Such suggestions upset German voters and politicians, who resist bailing out the profligate and say a pan-European bond would be illegal.
Graham Turner of GFC Economics in London forecasts this anger will drive the EU apart instead of bolster unity. He said during the worst of the crisis in November that the return of the Deutschemark was a “realistic prospect” for 2011.
Germany and healthy neighbours such as Austria could leave the single currency, allowing it to devalue to a point where exports from Greece, Spain and Portugal would become competitive again.
Most analysts can’t see Germany taking that step because the euro’s slump has had a silver lining. A soaring super-mark would put a quick end to the export boom that’s made the German economy the envy of Europe. German banks would also suffer, as they hold bonds from every euro nation that would immediately collapse in value.
Given this stalemate, the European Central Bank has been driven to buy troubled debt from countries such as Ireland as a stopgap, stabilising the euro for now. But currencies are intimately linked with government bond markets, where next year looks anything but encouraging.
“The eurozone has to refinance a record $750bn of debt in 2011, and this pressure is likely to force Portugal into the unenviable position in following Ireland and Greece on the road towards emergency funding,” says David Rosenberg, an economist at Gluskin Sheff in Toronto and noted bear on the global economy since his days as Merrill Lynch’s top pundit.
The euro’s biggest friend in 2011 may be Federal Reserve chairman Ben Bernanke, who has threatened to print even more dollars to support the staggering US economy. As long as he does, the single currency can only slide so far.