Fears that Greece may need an expensive and embarrassing bailout are heaping pressure on the euro. But many European businesses and politicians are quietly relieved at the common currency’s decline.
Markets think the European Union will use any means necessary to prevent the political setback to the euro of a default by a Member State, and to contain risks that financial panic might spread to other economies such as Portugal and Spain.
The front-runner solution at the moment appears to be that the French and German governments may use State-owned banks to guarantee or buy Greek bonds to help Athens cover some EUR54bn in debt coming due this year.
Growing confidence in a bailout or other solution to Greece’s immediate problems helped the euro stabilise around the $1.36 mark on Tuesday.
That’s way down on the $1.5144 level it reached in November and analysts say the 2009 low of $1.2455 could be looming on the horizon.
The crisis is bad news for the monetary union, since it has exposed its inability to keep governments from spending beyond their means. That could weigh on the euro for years, and mean higher borrowing costs for
governments.
But the weaker currency can also give Europe’s exporters a more competitive edge by making their goods cheaper abroad.
“A weaker euro in the short term is an opportunity,” Daimler AG chief executive, Dieter Zetsche, said on Tuesday at the Geneva Motor Show, though he added: “While we would be benefiting in the short term from some pressure on the euro, we are not be wishing for that.”
Jukka-Pekka Kaar, the chief economist for Finnish Forest Industries, said that “the weaker the euro, the better is for Finnish industry and exports. Even though it has come down from last year it’s still fairly strong especially if you look back to when it was on a par with the US dollar.”
In 2003, the euro was at $1, or parity with the dollar, after falling as low as 82 cents in 2000. Its all-time high is $1.6038 from July 2008.
Like other paper makers in the global downturn, Finland’s Stora Enso Oyj – one of Europe’s largest forest products companies – has been plagued by tough competition, overcapacity and weakening demand. It has cut thousands of jobs, closed mills and cut production.
The falling euro provides some respite, but can take a while to have an effect since many companies have already taken steps to protect themselves, such as hedging in currency markets. “We have fairly robust protective measures against currency fluctuations to maintain stability so the effects of such fluctuations come with quite a delay, and the effects have been very short term to date,” Stora’s chief financial officer, Markus Rauramo said.
The euro’s current malaise stands in stark contrast to what was going on as recently as November, when top policymakers, including European Central Bank president Jean-Claude Trichet, were voicing their concerns at the euro’s rise.
At that level, the stronger euro threatened to price struggling manufacturers out of crucial export markets – for an economy highly dependent on the export of high-value goods, a too-strong currency was choking.
The Greek crisis worsened when Dubai’s government-owned investment vehicle Dubai World said it needed time to pay off its debt.
Traders began to reassess government borrowers, in general, and wondered which country would be hit next.
When the new Greek government of Prime Minister George Papandreou tore up the previous government’s deficit estimate and tripled it to 12.7 per cent of economic output, the markets had their answer and the euro retreat was on.
So long as the euro selling does not become a disorderly panic, which could affect confidence in the barely growing euro zone economy and stoke inflationary fears, the lower currency is unlikely to ring too many alarm bells in the 16 capitals of the single currency bloc.
“If the cost of preserving political union is a weaker currency over time then perhaps this isn’t that great a cost to bear,” said Simon Derrick, senior currency strategist at Bank of New York Mellon.
In the longer view, however, the current crisis has laid bare the time bomb ticking at the heart of the euro experiment: the lack of budgetary union alongside monetary union.
Experts say unified fiscal policy is needed to prevent countries from running up massive debts that weigh on the single currency’s credibility.
Most analysts think occasional talk of a break-up of the single currency, however, is far-fetched.
Jane Foley, research director at Forex.com, said any bailout of Greece would be “little more than a band-aid on a system which clearly lacks adequate fiscal constraints. The fiscal difficulties facing Greece and potentially other countries in the euro zone could weigh on the euro for months to come”.
The principal long-term cost of bailing out Greece is that it would dilute the euro’s reputation as the successor to Germany’s stable deutsche mark. By giving a strong currency to countries with shakier finances such as Greece and Italy, the introduction of the euro let their governments borrow at low rates just as the Germans had been able to do for years.
The loss of this deutsche mark premium may well be a price many in the euro zone will be willing to pay.
Much depends on the Greek outcome, and not everyone is so down on the euro.
Daragh Maher, deputy head of global foreign exchange strategy at Credit Agricole, says the euro could rally on good news out of Greece whether it be a successful bond launch, further fiscal measures or clearer signs of financial support from outside Greece.
“We remain confident that the euro will rally towards $1.40 in the coming weeks as the substantial Greek discount is pared back,” said Maher.
