Looking for a safe haven? You’ll have to go a long way to find one, reckons Ed Yardeni of Yardeni Research. He says anyone seeking fiscal discipline, small government and low taxes should give up on earth and head for Kepler-22b, a planet just discovered by Nasa. It has a pleasant sounding surface temperature of 22 degrees, might have a water supply and is, as far as we know, currently debt free. The tricky bit of course is getting there – it is 600 light years away. But can the journey be any more difficult than the route out of the eurozone crisis?
Still, if there were fiscally responsible alien life on Kepler-22, it might not think the climate’s too bad in Europe, either.
Why? Because, as many readers have pointed out to me – mostly on empty-pocketed returns from holidays in Italy and Spain – the euro is a bizarrely strong currency. Britain’s middle classes have long assumed that the silver lining to the implosion of the eurozone would at least be cheap skiing trips. But that’s just not happening.
Look at the euro against the dollar and you will see that the exchange rate has been moving in roughly the same range for the last three years – despite the fact that half the world seems to think the currency is on the verge of extinction.
So what’s going on? It might be that the euro is being supported by institutions repatriating capital to shore up their balance sheets – selling dollars and pounds to buy euros. But there is probably more to it than that.
In a world where most Western countries are fighting to devalue their currencies, the euro arguably looks less bad than it would otherwise. The US and the UK have made it clear that they will print unlimited amounts of money should they see the need. Europe – or the European Central Bank (ECB) – hasn’t.
As a whole, Europe also doesn’t have the same nasty trade deficits as the US and the UK. Add that to its relatively high interest rates (we live in a world where 1% is high) and the euro – even if many of the countries it represents are basically bust and its banks are in a funding crisis – looks like a hardish currency in a world awash with quantitative easing.
This leads to a second possible reason: that the euro is trading as something of a proxy for a currency of the stronger nations. There are two assumptions behind this argument. First, if the eurozone holds together, it will do so because fiscal union brings austerity and a new era of creditworthy nations living under sound money. Second, if that doesn’t work out and the eurozone breaks down, it will divide into two parts: the strong (led by Germany), and the weak.
The strong would get to keep the euro and the weak would leave it behind.
So by holding euros today, you are betting that you are in fact holding a kind of new deutschmark.
This makes sense at first glance. But not at second.
If the eurozone doesn’t hold together, it is hard to see how the countries currently considered elite would stay that way. Let’s not forget that, pre-euro, Germany was the sick man of Europe. Given how dependent the growth of its export economy has been on the existence of the euro, who’s to say what the end of the euro might do to it? That’s before we start worrying about the round of banking crises likely to follow currency collapse.
And what if the euro sticks together? Levels of sovereign debt are now so high that it no longer matters how many meetings are had on the matters of fiscal union and austerity – it won’t be enough. In the end, one way or another, the ECB will have to pick up the pace of debt monetisation (creating money to buy national debt), just like the Fed and the Bank of England.
Eventually, the euro, like everything else, will be valued according to the strength of its weakest link: think more drachma than deutschmark. A reason perhaps to leave booking your 2012 holidays until the last minute.
• This article was first published in the Financial Times