The Phaserl


The Euro Is Stronger Than You Think

by Jim Rickards, DailyReckoning:

The euro is the currency of the largest economy in the world, but it gets little respect.

The break-up of the Eurozone (those EU countries that use the euro as their currency), and the collapse of the euro have been predicted repeatedly since 2009 by prominent U.S. economists Paul Krugman, Joe Stiglitz, (Krugman and Stiglitz are both winners of the Nobel Prize), Nouriel Roubini, and others, as well as European public intellectuals such as Anatole Kaletsky, Howard Davies, and many lesser lights.

I’ve been on the other side of that debate the entire time. My view is the euro is here to stay, and will grow stronger in the years ahead.

The evidence backs me up. Since the European sovereign debt crisis emerged in early 2010, not a single member country has left the euro, and three new member countries (Estonia, Latvia, and Lithuania) have been added. This brings the total to 19 member countries. I expect other countries will join in the years ahead, including Scotland, Croatia, and the Czech Republic.

After yesterday’s opening round of French elections, the euro is now at $1.0852 — and it has never fallen below $1.0385 on seven dips in the past two years. Analysts have repeatedly said the euro will “go to par” (meaning a EUR/USD cross rate of $1.00 or less).

Over two years ago, on Bloomberg TV with my friend Trish Regan I predicted the euro would not go to par.

Trish and her co-host Matt Miller were both incredulous in that 2015 interview, but I was right. The euro bounced off a low of $1.04 about a month later and rose to $1.16 five months after that, a nearly 12% gain for a currency the world had given up for dead.

As I said, the euro don’t get respect. But, investors who look past the negative publicity can reap huge gains as the euro positions itself for a major rally starting this summer.

The current low in the euro is an excellent entry point for huge profits in the months ahead.

Why is the euro consistently disparaged and denigrated by analysts who should know better? Why doesn’t the euro get respect?

The answer is cognitive bias. U.S. analysts in particular receive a lot of their information about “Europe” from UK sources, especially the London-based publications Economist and Financial Times.

Those publications have opposed the euro for decades and continually denigrate the European project consisting of the EU, the Eurozone, the euro, and their predecessors. Americans lean on London because of the language and travel barriers of consulting German, Greek or other continental sources. Still, this distorts their views.

The most persistent criticism of the euro is that the Eurozone lacks a unified fiscal policy to go with its unified monetary policy under European Central Bank (ECB) direction. Of course, this is true but it misses the point.

The founders of the euro knew that a unified fiscal policy would be needed, but that was too much too soon to ask of European voters in the 1990s when the Maastricht Treaty on the EU, which led to the creation of the euro, was ratified.

EU proponents settled on the more popular monetary union doable at the time. The idea was to push for unified fiscal policy, and eventually true “eurobonds” (guaranteed by the entire Eurozone) at a later date. The answer to critics of the Eurozone is not to blow-up the Eurozone, but to push for unified fiscal policy. The shorthand for this approach is “More Europe.”

The EU is pursuing a number of initiatives consistent with the idea of More Europe. These include unified banking regulation, unified bank deposit insurance, and unified application of the new “bail-in” rules to replace bank bailouts as mandated by the G20 at their meeting in Brisbane, Australia in November 2014.

All of these policies combined with movement toward unified fiscal policy, eurobonds, and hard ceilings on deficits and debt-to-GDP ratios will strengthen the EU, contrary to the catcalls from critics.

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