The euro is rising. It has now recovered by almost 5% from its lows below 1.04 against the dollar. It would appear that the strength of the German economy is outweighing the weakness in the south and east of the EU. It is as though the very fact of having acknowledged that progress will be made at – at least – two different speeds has allowed the single currency to leave its uncertainties behind.
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It is as if the figure published by the IFO German (112.3) – higher than expected (111) – could serve to reinforce and accelerate the rise in interest rates in Europe, in true American style. It is true that this and other figures confirm Germany’s economic recovery, but these trees of unambiguous optimism must not prevent us from seeing the forest in which the currency is mired unique. And that forest is none other than the very unworkability of its quality as unique. In other words, the euro is still shared by many countries that are a world away from even imagining a relaxation of the quantitative easing measures with which the ECB is flooding the economies of the South. And this makes an interest rate rise impossible – a rise which, paradoxically, the market is already pricing in with the euro’s recovery against the dollar.
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Where does this paradox lead us? Well, it leads us to the conclusion that The more the market prices in a rise in euro interest rates and a scaling back of quantitative easing by the ECB, the closer we will be to the emergence of a two-speed Eurozone, and therefore to the breakdown of the single euro exchange rate. Since either the euro will cease to be the single currency and begin to trade at different rates across the eurozone, or a rise in interest rates will be impossible, in which case the price of the euro against the dollar and the rest of the hard currencies The risk of the eurozone itself imploding (to use the term employed by EU leaders themselves to justify this ‘two- or multi-speed’ approach) should be priced in once again and fall back to record lows.
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If the euro exchange rate remains fixed, it is impossible to raise interest rates, as we in the South simply cannot afford it. Here we need zero interest rates and high inflation to gradually erode the debt. However, in the German core, what they cannot and will not allow is for interest rates not to rise and for their much-feared inflation to surge beyond desirable levels. Therefore, faced with such a dichotomy, either Mr Market is heading in the opposite direction, or the already-announced ‘two-speed’ Europe is just around the corner.
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Nor is the strong reaction from Dijsselbloem, which suggests that many northern Europeans no longer feel obliged to show even political correctness towards those they consider to be, de facto, no longer part of their European core or hard centre. Their apologies – forced, perfunctory and belated – betray that sense of detachment and disconnection which we, the inhabitants and investors of the South, do not yet seem to have grasped. The curious thing is that the average investor in the South has accepted the ‘two-speed’ model without realising that this implies two different exchange rates and two distinct interest rates. Not for nothing Guy Verhofstadt (yes, the very same person who is overseeing the Brexit negotiations on behalf of the EU) has already stated publicly that it should be set up a second central bank in Brussels. Two speeds, two monetary authorities… It’s as plain as day, and we have to to be prepared for that scenario.
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To create the «two-speed» omelette, the euro’s shell must be broken. The ‘single’ currency must be split in two. And although they will share the same name and have virtually the same initial exchange rate – to avoid panic – they will have different valuations and different interest rates within a short space of time. These differences in interest rates and exchange rates will be in line with the needs of the various economies – as is only to be expected. And the most curious thing is that even some institutional investors, who do manage to envisage the emergence of these two speeds and two monetary policies, are surprisingly confident that Spain will be in the first speed! Why? Well, because the Spanish government has said so, touting the highest GDP growth in the Eurozone, whilst ignoring the budget deficit, the debt and the appalling, endemic unemployment. And as we all know, governments – especially those on the European periphery – are always spot on with their forecasts, aren’t they?