One curiosity of the euro area's debt crisis has been that the euro itself has held up reasonably well. Its trade-weighted index is now around where it was in early January, and is barely five per cent down in the last two years. To those of us whose economic preconceptions were formed in the 1980s, when we were brought up to believe that exchange rates overshoot and are excessively volatile, this stability seems odd. I suspect there are three reasons for it.
First, the main alternatives to the euro aren't hugely attractive. Even if the Fed and Bank of England don't extend QE, short-term interest rates in the UK and US are likely to stay low for many months. Anyone wanting even a small interest rate pick-up must look to currencies such as the Canadian or Australian dollar or the Norwegian krone. But people who are nervous about global growth won't want to take the commodity price risks which such currencies offer. The old joke about forex strategy - "don't like any of 'em" - is more true now than for a long time.
Secondly, the attention Greece is getting is out of proportion to its economic significance. Greek GDP, at €215.1bn last year, represents only 2.2 per cent of the euro area's economy. It is about as important to the euro area as the state of Maryland is to the US economy. If Maryland were to suffer an economic crisis, would the US dollar plummet? No. So why expect the euro to do so because of Greece's woes?
The question gains force because the euro area's biggest economy - Germany, which accounts for a fifth of its GDP - is doing OK. Its exporters, says Dario Perkins at Lombard Street Research, are "super-competitive". Thanks to them, the euro area as a whole has a small current account surplus with the rest of the world. And this, says Mr Perkins, suggests that the euro "is not significantly overvalued."
Yes, the Greek (and Spanish, and Portuguese…) crisis has led investors to flee into safe havens. But much of this fleeing has led to money flows within the euro area rather than out of it; the fact that five year German government bonds yield just 0.54 per cent shows that there’s a safe haven with the euro.
A third factor supporting the euro is simply that it is in relatively short supply. The money stock (on the M1 definition) has risen just 2.7 per cent in the last 12 months, whilst its US equivalent has grown 18.1 per cent. The Fed has been printing money, but the ECB has not. Until this changes, there is another reason not to expect the euro to fall very much.
And herein lies a paradox. A partial break-up of the euro might actually strengthen the currency, simply because the pressure on the ECB to run a loose monetary policy would diminish; a monetary policy focused solely upon Germany's needs would be rather tighter than present policy. It is if the ECB embarks upon full-blown QE as part of a package to solve the euro crisis that the euro is more likely to fall a lot. And this is only a possibility rather than a probability.
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Chris blogs at http://stumblingandmumbling.typepad.com