**Wonking Out: The Meaning of the Plunging Euro** **by Paul Krugman, The New York Times, July 15, 2022**
**...** **Monetary policy can move a currency temporarily away from that long-run value. Suppose the Federal Reserve raises interest rates while its counterpart, the European Central Bank, does not. The higher yields on dollar assets will attract investment to the United States, pushing the value of the dollar up. However, investors will normally expect an eventual reversion of the dollar to its long-run value, so that higher yields on dollar assets will be offset by expected capital losses from future dollar declines — and these losses will be bigger, the higher the dollar goes. The dollar-to-euro exchange rate therefore rises only to the level at which expected capital losses just offset the difference in yields between dollar and euro bonds....**
**There is, I’d argue, a deeper story behind the euro’s slide. It’s a common observation that a weak currency need not be a symptom of a weak economy. But, in this case, the weak euro probably does reflect real economic weaknesses — especially the bad bet that Europe, and Germany in particular, made in relying on the reasonableness of autocrats....**
**I suspect the central reason for the euro’s plunge is not interest rates, but a major downward revision in investors’ views of European competitiveness, and hence of the perceived long-run sustainable value of Europe’s currency. It’s a bit simplified, but not that far from the truth, to say that over the past couple of decades Europe — especially Germany, the core of the Continent’s economy — has tried to build prosperity on two pillars: cheap natural gas from Russia and, to a lesser extent, exports of manufactured goods to China....** [end quote]
Until Europe finds a non-Russian energy source and China recovers its growth and import ability, the foundation of the euro will be weaker than before. This will take longer than swings in central bank interest rates.
Until Europe finds a non-Russian energy source and China recovers its growth and import ability, the foundation of the euro will be weaker than before. This will take longer than swings in central bank interest rates.
Does that also explain why the Turkey, Japan, Argentina, Britain, South Korea, Israel, India, South Africa, China, and Indonesia are in the same fix as the euro?
The value of the U.S. dollar is the strongest it has been in a generation, devaluing currencies around the world and unsettling the outlook for the global economy as it upends everything from the cost of a vacation abroad to the profitability of multinational companies.
Some see the price of oil as a tax on the economy.
Rising oil prices contribute to the economic woes of all nations–including the ones you name. And are attributed indirectly to the conflict in Ukraine.
Yes, its the same base cause. At least until recession bites into the numbers.
All this argues for a relatively rapid drawing to a close of the Ukraine/Russia conflict with an agreed stalemate. Sure, Ukraine can continue to hit Russian ammo depots to prevent them from spreading further westward, but if the EU/US stop sending an infinite amount of ammunition, that will also minimize. My guess is that the conflict will peter down by Xmas.
Russia has the resources to continue the conflict for decades. Anything else is indeed a guess. Russia will probably continue the conflict on its own terms for how ever long it wishes.
It’s a bit simplified, but not that far from the truth, to say that over the past couple of decades Europe — especially Germany, the core of the Continent’s economy — has tried to build prosperity on two pillars: cheap natural gas from Russia and, to a lesser extent, exports of manufactured goods to China…
Europe including Germany in many aspects has reaped a overly pleasant peace dividend since the cold war ended. Turns out the war has not ended once and for all, so costly adjustments (mindset and money-wise) will have to be made.
Then again, the Swiss Franc has stayed strong (still above the dollar), and Switzerland is subject to the same challenges.
So perhaps for now the weak euro really is mostly a result of Lagarde unwilling to hike, combined with the fear that if she did she’d be pushing the Club Med over the edge.
The eurobond market is causing problems. The mere hint of an interest rate rise by the ECB sent the Italian 10-year bond yield to over 4%. Italy is broke. It’s debt to GDP is 170% and rising by €18 billion a month. The government there collapsed recently. The coalition tried to pass an austerity programme but was brought down by one of the members who wanted to borrow more money to give to people suffering from inflation! If Italy was not in the eurozone its currency would be in freefall like the yen following the latest QE in Japan.
The so called PIIGS have been kept afloat by the other EU members for years. I’m seeing signs that they are not so keen to keep bailing the PIIGS out.
The euro was created for political, not economic, reasons. It is being pulled apart.
The mere hint of an interest rate rise by the ECB sent the Italian 10-year bond yield to over 4%. Italy is broke. It’s debt to GDP is 170% and rising by €18 billion a month. The government there collapsed recently.
It appears Lagarde now has a plan how to fight the bond market assigning ‚unwarranted’ risk premiums to different eurozone countries, based on long-outdated parameters such as state of their economies, debt, and deficits.
Rather than buying government bonds in quantities proportional to member states‘ sizes, they will focus on buying Italian bonds until the premium differences have gone down to ‚warranted‘ levels - in their own, superior judgement. The thing has an awe-inspiring name, too: ‚anti-fragmentation tool’.
No, I don’t make it up:
Lagarde said that from the start of July, the ECB would start tackling any “unwarranted fragmentation” in bond markets by using flexibility in the way it reinvests the proceeds of bonds that mature in the €1.7tn portfolio of assets bought to counter the impact of the coronavirus pandemic.
A possible next step for the EU would be to create a fiscal policy so that the monetary policy need not be so horrifically distorted.
Perhaps have the EU pay for a southern tier border system that intercepts and/or receives and processes and even trains illegal immigrants from the south. That would require a huge complex of ports, ships, housing, and the skilled people to operate it all. Building it correctly would create a big but potentially useful wealth transfer from the richer north to the poorer south while mostly keeping the funds out of the hands of corrupt people in Greece, Italy, and Spain
Europe will need such a system very very soon as GCC pushes people out of Africa.
Europe will need such a system very very soon as GCC pushes people out of Africa.
That money is far better spent modernizing the energy supply systems to cut out greenhouse gasses. We have to stop avoiding the expense. We need in the major economies to embrace the crossover. I get of the four major economies that matter, US+++(Canada+Japan+Israel), EU, India and China, the EU is the leader. It is nowhere near enough. This is an opportunity as is everything in life.
The political blowback of settling immigrants is a massive distraction from modernizing. We can end the warming quickly or not at all.
As Einstein said, Everything is Relative (or something like that anyway).
As Suissebear reported, as the USD remains strong, the CHF is still valued higher. That means that the two currencies aren’t rising so much as the Euro and Yen are dropping. The Leap1 comments that “The Euro will be back and very strong. The USD will remain appreciated.” is context are meaningless as the USD would be losing value compared to the Euro if the Euro rose.
Anyhow, we in the US feel that we live in a single country, but the strength of the concept of our being a federation of 50 separate “States” is still alive and newsworthy. The EU is even more loosely confederated and, not to put too fine a point on it, French feel than they are different from Germans, Hungarians, Finns and so on - and the feelings are reciprocal. It is not unusual to have politicians rail against the “unelected bureaucrats in Brussels” making policies counter to local desires (one of the primary Brexit arguments), and it is this rhetoric which counters a more powerful centralized government.
This is not just an argument for fiscal/monetary policy, but also for individual national sovereignty. Everyone is willing to accept the largess of Brussels, but few are eager to pay increased taxes to the central government. (Not an unusual sentiment among the US states either).
The outbreak of significant war in Europe for the first time since 1945 (excluding the Yugoslavian self destruction) has enough parallels to the last challenge to give pause to anyone who has read history. Things have changed and Europe as well as the world are wrestling with what the new normal will become. Until the risks can be quantified, it is the uncertainty which is driving the oscillations.
The mere hint of an interest rate rise by the ECB sent the Italian 10-year bond yield to over 4%. — Lagarde said that from the start of July, the ECB would start tackling any “unwarranted fragmentation” in bond markets…
It would seem that investors have a different view of ‘unwarranted’ than the ECB does.
It is not meaningless. After this period of inflation we will head into a period of relatively low input costs. The USD and EUR will be enjoying purchasing power.
We are not generally forex traders. We are generally investing. Having purchasing power is the name of our game.