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Euro crisis: 'We are in the eye of the storm right now'

Text by Katherine THOMPSON

Latest update : 2010-05-19

Another day, another euro crisis. It seems that the common currency's roller coaster ride is not over yet. But is their light at the end of the tunnel, or more to come? FRANCE 24 took the pulse of leading financial analysts to find out their view.

Is their light at the end of the tunnel for the euro, or can we expect more drama on the financial markets over the coming weeks and months? FRANCE24 spoke to leading analysts and currency strategists to get their views on the current financial crisis, and to find out how the common European currency has arrived at its present predicament. 

Eight days after the EU and IMF agreed a 750 billion dollar bailout package for the crisis-hit eurozone economies, the financial markets are still in flux. And despite this unprecedented intervention, analysts remain sceptical. “We are in the eye of the storm right now,” Jeremy Batstone-Carr, Director of Private Client Research at Charles Stanley in London, told FRANCE24.
 
So why is the euro taking such a beating on the financial markets?
 
How did the euro come to this?
 
The unthinkable: should Greece be allowed to fail?

“Greece should be allowed to fail. I don’t believe in too big to fail, but I do think there are some that are too big to exist,” argues Jeremy Batstone-Carr, Director of Private Client Research at Charles Stanley in London. He also points out that the current bailout culture is encouraging risk taking on the financial markets.

Financial markets would have raised the red flag far earlier about Greece’s debt levels had it kept the drachma and not been in the euro. Weaker economies in the eurozone were given free reign to run up deficits beyond their means simply because of their membership of the eurozone club. The market’s belief and faith in the European project shielded Greece from the harsh realities of its precarious financial position.
 
Furthermore, an innate weakness in the euro existed from the beginning, argues Hans Redeker, Global Head of Foreign Exchange Strategy at BNP Paribas. He argues that it comes down to how the “currency union was created… and its members' flexible interpretation of the Maastricht Treaty.”
 
National vs European interests
 
Europe allowed economies to run up debts beyond agreed levels, says Redeker.
 
And, “there was no political coordination… despite the veneer of cooperation there is clear evidence of countries looking after their national interests in the eurozone,” argues Redeker.
 
Batstone-Carr agrees, stating, “There can be no economic union without true political union.”
 
If the eurozone wants the euro’s nightmare run to end, it needs to fully embrace political and economic cooperation and speak with one clear voice.
 
German Chancellor Angela Merkel’s comments on 19 May that “the euro is in danger” sent the euro spiraling downwards. Emotive remarks such as these are clearly having an immediate and direct impact on the markets. President Nicolas Sarkozy’s rumoured meltdown at a meeting last week, where he declared in a fit of rage that he would pull France out of the euro unless action was taken on the Greece issue, also did little to calm investor concerns.
 
The irresponsible comments, leaks and policy flip-flops have been eaten up by the international media, and in the meantime sent investors running for the hills. During a financial crisis the markets want rapid, clear and succinct action and, to put it mildly, the Europeans failed.
 
Has the 750 billion euro package helped the euro?
 
The bailout package is described as “a kind of morphine that stabilises the patient” by Marek Belka, IMF chief representative for Europe, who worryingly went on to say, “Real treatment has yet to come.”
 
This appears to be a commonly held view. Many argue that the bailout package has done little more than buy the euro some time, in no way addressing its fundamental problems. Debt is the euro’s big problem, so a debt-based rescue package is perhaps a questionable solution. There are also real concerns that Greece may struggle with its repayments.
 
Every cloud has a silver lining…

Redeker argues that devaluation is the only way forward, but “in an orderly manner.” Key to the euro's successful devaulation according to Redeker is the “pace” at which it must take place: it must occur gradually. He also believes that the euro must remain in retreat for the foreseeable future.
 
This, though a humiliation for the architects of the European single currency, is not necessarily bad news.
 
A devalued euro will allow Europe to build up its export strength, which will be welcome news to many European economies. A weaker euro will make the bloc more competitive against the US and other Asian economies.
 
This move could therefore give a much-needed boast to Europe’s balance sheet as it battles its way out of the quagmire.
 
The key to whether the euro can dig its way out of its current hole is confidence. And right now, no one has confidence in the single currency. Europe needs to start speaking with one voice on the euro, take coordinated action as a unit, and put aside national interests.

Date created : 2010-05-19

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