Wednesday

15th Aug 2018

Euro is safe, German economists say

German analysts have poured cold water on rumours that the European Monetary Union (EMU) might be broken up in the wake of the French and Dutch no votes, but the fears helped propel the euro toward an eight month low against the US dollar, hitting 1.22030 this morning.

"It [an EMU break up] is not a realistic scenario", Commerzbank economist Christoph Balz told EUobserver. "But in the current mood of the market, everybody jumped on the news. Even if it was later denied, the market still thought if there is smoke, there is fire".

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Germany's Stern magazine published news on Wednesday (1 June) about a recent meeting between German finance minister Hans Eichel, Bundesbank president Axel Weber and private sector analysts which purportedly discussed Germany's exit from the common currency.

Berlin and the national bank both denied the report, while analysts at major German banks indicated that what really happened was that one of the private sector economists at the gathering mentioned a potential EMU crisis and the mere presence of high-ranking officials gave the speculation undue weight.

"I wouldn't take it too seriously", Dresdner Bank economist Claudia Broyer said. "There is a possible train of thought that starts with - how can we beat unemployment? If the Lisbon process is not enough, maybe we should abandon the stability and growth pact? Going a step further, if there is no pact, why should we keep the ECB [European Central Bank]? And if there is no ECB, there is no euro. But we are very far from this from today's perspective".

The Commerzbank source added that, while there is popular sentiment in Germany that the country should revert to the Deutschmark, this is just a knee jerk reaction to the country's weak economy.

"If growth and employment picked up, you would get a very different answer in the polls", Mr Balz remarked.

Another German analyst explained that it would be "extremely expensive" to return to the Deutschmark and that "the market will soon go back to normal business, everyone will see there is a strong commitment to the euro".

The ECB itself pointed out that exiting the EMU would require a re-negotiation of the current Treaty via an intergovernmental conference.

"The Treaty is such that this is not an option", a contact at the bank stated.

Meanwhile, former ECB head Wim Duisenberg also came out in support of the euro following the Dutch no, saying "Neither the old constitutions [the treaties of Maastricht, Amsterdam and Nice] nor the new constitution did not touch the position or the statute of the European bank. The ECB will go on with business as usual".

Weak economy drags down euro

The long-expected French and Dutch no votes gave the sliding euro an extra nudge on its way down, but the real reasons behind the negative mood of the currency markets are the weak and divergent economies in the eurozone coupled with more positive financial news coming out of the US - the German analysts agreed.

"When such an exchange movement has started, it usually continues in the same direction for a while, especially if you have another push in the same direction", Ms Broyer remarked.

She said that the French no vote and the recent crisis in the German government, which forced chancellor Gerhard Schroder to call for early elections, could damage Paris and Berlin's chances of pushing through painful economic reforms.

Ms Broyer added that, "you can't hold onto Europe's social model without growth and employment. The only way that this is possible is to really push forward the Lisbon Agenda".

But another German banker said that the constitutional fiasco could help propel economic changes forward, as governments turn their attention away from the political mess to concentrate on the economic side of the union.

The weaker euro is also set to boost the fortunes of European exporters, the Commerzbank economist indicated.

He pointed out that the low currency will reduce European purchasing power for energy and other commodities, but said the movements are not likely to be strong enough to change the outlook for inflation.

"We are probably close to the bottom of the movement. This [the weakening of the euro] is the current mood of the market, but it is not the beginning of a trend", he said.

The Dresdner bank analyst also sought to put things in perspective by noting that the euro has been below parity with the dollar in the past.

"We are very far away from this", she said.

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