Euro Trash is in this year.
I’m not referring to the human sub-phylum of half-shaven nouveau degenerates gadding about the European continent in hip-hugging jeans with their anorexic girlfriends who air kisses in a sign of faux affection.
Rather, I’m talking about their money. The euro is getting hammered, and the worst may not be over.
Since the New Year, the euro has lost approximately 10 percent of its value against the dollar or about 15 cents. The struggles of the debt-laden Greek economy have exposed an underlying weakness of the currency and the economic union it represents.
While the European Union may represent a dynamic economic powerhouse to rival the United States, the situation in Greece has confirmed that it is only as strong as its weakest link.
Greece Is Not Alone in Trouble
With the euro continuing to fall, investors are clearly nervous that the common currency has not found the bottom. Looking beyond the immediacy of the Greek crisis, investors appear to be concerned with the solvency of not just a few of its member states, but of the Union itself.
The E.U. generates a joint GDP of about $18 trillion, with Germany and France comprising nearly one-third of the prosperity. Although Greece has become the poster child for fiscal mismanagement and corruption, several other members recently have come under close budget scrutiny including Italy, Ireland Spain and Portugal.
Derivative traders are signaling that the euro’s slump to a nine-month low will continue even if European Union leaders bail out Greece. Short-term rates for borrowing in euros in the forwards market are the cheapest relative to loans in dollars since September. The 50 percent collapse in that spread this month signals investors are betting the European Central Bank will keep its target interest rate at a record low, sacrificing euro strength to prevent deficit cutting by debt-laden economies in the region from stymieing growth.
Only last year, speculators were touting the euro as a legitimate challenger to the dollar’s pre-eminence as the world’s only reserve currency. Now investors are looking for new reasons to dump the euro.
More Negativism
Currency speculators seem to fear that the fiscal belt-tightening in Greece, Spain and Portugal could plunge those economies back into a recession. Although their budget woes are not quite as desperate, the economies of Ireland and Italy also are at risk.
Unlike the United States, which has the ability to print more money to pay its debts, none of these troubled economies has the same luxury.
Last week the U.S. Federal Reserve raised the rate it charges banks for direct loans by a quarter percent. In sharp contrast to the ECB, which may have to lower rates to spur a continued recovery, this action is a sign that it is getting ready to curtail its unprecedented fiscal stimulus.
If the euro continues to fall, American travelers looking for bargains this summer may find themselves booking bargain vacations in Paris, Rome and Athens instead of Orlando.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
