Euro weakness persists… How can they solve this crisis?
The Euro has been pushed further to new lows against the pound and the Dollar as investors fear continued uncertainty surrounding the resolution of any crisis. The interest rates on pretty much all European bonds shot up, with German, Spanish and Italian yields catching headlines.
I think that these problems are only going to persist and the only way to stop this is for the ECB, Germany and others with the power to move the market, to undertake some of the following steps.
EUROBONDS – Put all of the Euro currency governments borrowing on the same footing. Increases the rate for Germany but allows cheaper borrowing by troubled economies. Although the Germans are adamantly opposed, the measures are gathering support.
ECB to act as lender of last resort – The ECB does not guarantee the banks or governments in the Eurozone. Were they to undertake such a stance the markets would immediately settle as investors had confidence that the troubled economies had room to grow their way out of trouble. A huge step but not inconceivable.
Other measures include expansion of the EFSF and EFSM to allow them to cope with possible bailouts for Spain and Italy. But even by undertaking these measures the troubled Eurozone economies would not necessarily grow for many years however.
The measures needed to rescue the troubled economies and shore up those looking wobbly are quite staggering and will put some areas of the Eurozone in a stagnant period of awful austerity for possibly a decade. Already in Greece I am hearing of middle class professionals struggling to get money for food etc, the outcome of these elections is of huge importance.
Abandoning Greece is not in my opinion an option but what else will the Europeans do? This dire situation is really weighing down the Euro rate and we are already seeing the effects on international trade. China have announced further stimulus measures to protect their economy and the US and UK regularly moan about the effects a weak Europe is having on their recoveries and the global economy.
One thing is clear the status quo will not remain. We could be at 1.30 on GBPEUR or 1.15 in the next few weeks. Likewise on EURUSD we could hit similar levels depending on the outcome of the elections and the European leaders attitudes to how to solve the problems.
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