Why is the Euro still so cheap

17 July, 2015

Robin Haynes

That is the question many of our clients have been asking, after the Greek parliament passed new laws amid fierce opposition, paving the way for its third bailout since 2010. In fact there are several factors which have kept the Euro weak, rather than seeing it gain in value as we might have expected.

The bailout could make Greece’s debt unsustainable.
Christine Lagarde, head of the International Monetary Fund (which is one of Greece’s main creditors) has already said that she thinks the new deal will send Greek debt levels to over double its national economic output – implying that in reality, Greece will never be able to afford to repay its debts. This will be even more likely if the new austerity measures slow economic growth down further.

There are still tough negotiations to come.
Greece must still negotiate terms for its main bailout funds; yesterday only a ‘bridging loan’ of €7bn was approved which will barely cover Greece’s debt repayments due next week. Negotiations will still take some weeks, and exact terms must be agreed across the Eurozone. There is considerable opposition, for example German finance minister Wolfgang Shauble wanted Greece to leave the Eurozone at least temporarily, as recently as yesterday – jokingly offering to the USA that he would swap Puerto Rico for Greece if the Americans would issue US Dollars to Athens.

Greece’s government is in trouble.
The ruling Syriza government is expected to stay in power, but will now form a minority government after many of its MPs rebelled against the bailout laws. There are protests around the country, and with an unstable government seen as betraying democracy by ignoring its own referendum result, there is no guarantee that the Greek people will accept the new austerity measures lightly.

The Greek economy is in a worse state than the USA after the Great Depression.
8 years after the global economic crisis, Greece’s GDP (total economic output) per capita is still below 80% of its pre-crisis size; the USA’s figure at the same stage in the 1930s was over 90% and indeed the EU as a whole already has a bigger economy than in 2008. Capital controls will stay in place for the foreseeable future, with cash machine limits of €60 per day, and the banks are still facing a crisis. Unemployment is 25% and youth unemployment as much as 50% – hardly strong conditions to mount a recovery and start to pay down those debts. Under Eurozone rules, Greece cannot have any of its debt simply written off; it is stuck with its debt as long as it remains in the single currency.

Overall, markets have taken the ‘Agreekment’ as a largely political, not economic, solution. Sheer political will across Europe has kept Greece in the Euro, as the alternative was simply too unbearable to imagine in the corridors of power in Brussels and Berlin. But the markets usually have their way in the end, and so the Greek debt crisis and rumours of an exit from the Euro, could easily rumble on for months and years. The Euro as a consequence has not gained any value since the deal was forced through, in fact giving us fresh 8-year highs for GBP-EUR – great news for those of you sending money to Portugal, Spain, France or indeed anywhere else in Euros – for now at least.

Mark Carney gives interest rate hints

Closer to home, Bank of England Governor Mark Carney used a speech yesterday evening to suggest that UK interest rate rises might happen around “the turn of this year”. As is his style, Mr Carney is giving plenty of forward guidance on likely policy change, and the news gives the Pound a further boost in foreign exchange markets. Speculation about interest rate rises is usually good news for a currency, and the Pound made further gains in evening trade yesterday, having earlier fallen against the US Dollar but gained against the Euro.

All eyes across the Pond today

Today the only economic data of note are inflation figures from the USA and Canada, both at 1.30pm. Yesterday’s Eurozone inflation figures came out as expected, but any deviation from the anticipated figures this afternoon could easily influence the value of the US and Canadian dollars.