The forgotten Euro

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eurozone sovereign debt crisis
From being the most important currency only a few months back, the Euro has gone into obscurity at least for now. Arabian Gazette’s Zain Naeem reminds us that while Euro crisis is still not resolved, he is optimistic that when the debt maturity of the bailout comes around and the crisis comes to the forefront of the world economic powers, steps will be taken to mend the situation. Photo – Arne Dedert/EPA

With the focus shifting on the yen and the G-20 meeting addressing most of the concerns with the constantly sliding Japanese currency, it seems that the Euro has been put on the back burner for a while. From being the most important currency only a few months back, it has gone into obscurity and it seems that for some while things will persist this way. The recent depreciation in the yen following their easing monetary policy has been discussed in different circles and with the issue being considered in the G-7 and now the G-20 summit, it seems that it has gained traction over the period of time.

The proponents feel that the strategy should be followed in order to stimulate the economy and to spur growth that is desperately needed by the country while opposition feels that Japan is gaining an unfair advantage compared to its exporting competitors. Whatever the case maybe, it seems that this strategy will be allowed to follow for some time considering that Japan can fall into another deflationary period if this is not done. What about the euro then? Is it safe to consider that the problem about the Euro has been rectified? Sadly, leading bankers feel that this is not the case.

Lars Christensen, co-CEO of Saxo Bank feels that the currency is set to fail seeing that extensive measures have not be put into place and that it will consider to be a band aid in the long run. Following the austerity measures and bailout plans being given to the distressed countries, Euro has gained based on the confidence of the market but this gain is short lived as economic data will not support the rise in the value. Even now, the euro is strengthening while the economies of the stronger countries like Germany, France and Italy are actually shrinking.

The bleak view that the co-CEO is taking seems to reflect on the sentiment of high unemployment, job cuts and shrinking of economy in France and Spain. This in addition to the upcoming elections in Spain and Italy and the rising bond returns in these countries do show that they economy is going towards a downward trend which will continue to fall further. The decline is due to the fact that the euro crisis has not been addressed appropriately and until substantial steps are taken, this situation will continue in the future.

I believe that there is some truth to this but it seems more that the sentiment stems from the fact that market activity right now supports a minor bubble. The rise in the euro is fundamentally not justified but a correction is not of the magnitude that is being expected in the market. There are rumors that George Soros already holds a short position of $1 billion against the euro which might make some feel that the sky is falling.

I feel that there needs to be a depreciation in the currency in order to make it economically competitive in the market and to bring it at par with the rest of the world. In addition, the sudden rise in the value has to meet a plateau at some point and then fall in order to bring it back to more equitable terms. However, I am optimistic over the fact that when the debt maturity of the bailout comes around and the crisis comes to the forefront of the world economic powers, steps will be taken to mend the situation.

The whole of the world economy is levered on the European economy as a whole and when push comes to shove, they will do all in their power to save the currency which will act as a floor or a safety net not allowing the currency to crash as some feel that it will.

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