Megan Greene of RGE Economics has been writing interesting and useful commentaries on the Eurozone situation. Her most recent pieces that are well worth a read are here, here and here. What she wrote on February 27th was about the bitterness that pervades Greece. The story paints a picture of enormous political and governance changes that Greece has to do, Euro or no Euro. But, the pieces she wrote on March 6th and on April 2nd are two sides of the same coin.
It makes sense for Greece to be outside the Eurozone and it makes sense that core countries would benefit from a breakup of the EZ. The problem is, of course, now figuring out what constitutes the core. Even the Netherlands ha breached the fiscal deficit target. The less said about France, the better. But, the Dutch breach is probably one-off and France can still be deemed part of the core.
The key issue, as Gideon Rachman writes in his FT column, is this:
They (Spanish officials) argue that financial and economic crises in other European nations have rarely been solved by structural reform alone. In the cases of both Sweden in the 1990s and Iceland over the past couple of years, they also involved a major devaluation of the currency to boost competitiveness – something that is impossible inside the euro. The implication is clear. Spain has to get out of the euro.
That is the key. Not just in Sweden and in Iceland, even during the Asian crisis, it was the massive exchange rate weakness that made the crisis-affected countries ride the wave of IMF-imposed austerity.
That is why TGS is happy to present here, one more time, the column written in November 2011. It anticipates these challenges and issues. In fact, last year, there was the feeling that core and peripheral European nations diverged in their cycles. That does not appear to be the case, any more.
So, therefore, all should favour a weaker Euro now. It is not happening. Why? I do not know. I can only guess. America wants a weak currency equally desperately. Hence, EURUSD is locked in a range. What will break the range? If the range breaks out on the upside for EURUSD, the story is over for the worse. If it breaks out on the downside, America will be deeply worried and upset.
Perhaps, they both hope that they can muddle through with this. That is frustrating for all concerned, including us.