*How Putin is protecting the Euro – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/how-putin-is-protecting-the-euro/article65632467.ece

Russian leader’s invasion of Ukraine has seen a closing of ranks across Europe, and there’s not a whisper of the Euro falling apart

Back in 1999, when the Euro was being born, I read an article that said: “In heaven, the cooks are French, the policemen are English, the lovers are Italian, and it’s all organised by the Germans; in hell, the cooks are English, the policemen are French, the lovers are German and it’s all organised by the Italians”.

While this used all the national prejudices available, the point was that the Euro could not last. To many people’s surprise, it did and, indeed, prospered till the European debt crisis that was triggered by the 2007-08 economic collapse.

For months, it seemed that the Euro would have to implode as, on the one hand, several European governments (Greece, in particular) appeared willing to break away, and, on the other, the EU’s very strict rules prevented decisive action on resolving the problem.

The situation had become so grim for the Euro that I recall the German Consul General in Mumbai, at a public event, speaking of how Germany would never let the Euro fail; German friends privately said, “We’ll just throw more money into the pot”.

In the event, the EU changed its rules and the European Central Bank became more “modern” in its approach. The four-year crisis dissipated, although the Euro stayed extremely volatile, moving between 1.18 and nearly 1.60 (with an average value of around 1.40).

Subsequently, some of the “newer” members of the EU — Hungary, in particular — thumbed their noses at several EU rules with accelerating frequency and anti-EU (and anti-Euro) political parties gathered strength in different countries in Europe, including Italy and France.

Invasion effect

Fast forward to today, where Russian President Vladimir Putin’s invasion of Ukraine has seen an alarmed closing of ranks across the continent, and even as the Euro threatens to break below parity with the dollar, there is not even a whisper of the Euro falling apart. I guess there are now better English cooks, French policemen and German lovers — the Italians, though, remain the Italians (thank God).

So, where do we go from here?

Most analysts look for a break of parity very soon, given that the US inflation remains strong enough to where the Fed will very likely continue to hike rates strongly, while the ECB remains typically circumspect.

Again, there are likely large positions that would be triggered at, or on an immediate break of, parity, to where we could see a further downward slide — Deutsche Bank is looking for 95 US cents to the Euro in a couple of months.(On the other hand, there may well be large positions that would lose money if it breaks the barrier, and these players may be buying EUR/USD to prevent the slide.) There may also be fears that the ECB will jump out of its slumber and buy Euros to protect the precious level.

Impact on business

Now, while market action is all very well, there will also be — indeed, already is — an impact on business across the globe. Clearly exporters in the US as well as other countries (including India) will find it increasingly difficult to maintain margins and, ultimately, volumes, adding to the increasing pressure on growth.

Having said that, most observers don’t doubt that the exchange rate is out of balance and will certainly correct. But, as we know, markets can stay out of sync for long periods, and it would take something out of left field to turn the tide.

Putin is not going to suddenly change his mind and it is really his long shadow that is keeping Europe in the dark, which may be the prime reason for the Euro being under such pressure.

Thus, it would seem that straightforward measures, like the ECB intervening and/or raising rates, are not going to work on a sustained basis.

Again, the dollar is strong despite the most horrifying disarray in the US economy, from the tragic continuation of gun violence and ever-increasing polarisation in the population, neither of which are showing any signs of abating.

The only encouraging sign in the US is that unionisation appears to be making a comeback (and, incidentally, also in the UK).

Perhaps, the Democrats, capitalising on the Supreme Court’s unbelievable abortion decision, will make shocking gains in the mid-term elections, which could tilt the balance towards more expenditure and higher taxation, and that could finally derail the dollar because of high inflation despite continuing high interest rates.

The writer is CEO, Mecklai Financial

Published on July 12, 2022

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