Why The Euro’s Existence is at Risk and How to Trade it – Introduction
After the financial crisis, the European Union has been in trouble. The problems started before the crisis when interest rates were so low. The low interest rates encouraged increased borrowing by European companies and countries. After the countries that borrowed heavily started falling in trouble. The most troubled countries were Greece, Portugal, Ireland, and Cyprus. In 2012, sensing trouble, the ECB president Mario Draghi said that the ECB would do ‘whatever it takes’ to save the euro. This whatever it takes led to lower interest rates combined with large scale asset purchases. The latter program was known as Quantitative Easing. The program, which will end in this year will have purchased 2.3 trillion euros of assets. The ECB has continued to retain interest rates at historical lows and there is no end in sight.
The European Union is in crisis. Two weeks ago, the European Commission released a report that lowered economic growth forecasts for 2018, 2019, and 2020. The commission attributed these problems to the ongoing issues of trade.
The past few years have been challenging for the euro. In 2015, Greece was unable to pay its debt. This led to tough negotiations between the country, the EU, and the International Monetary Fund (IMF). At the time, the term Grexit was coined to mean the exit of Greece from the European Union. Ultimately, the parties agreed to a bailout agreement. While this bailout has calmed the markets, the fact is that Greece is still a country in trouble.
After Grexit, came Brexit. In 2016, then prime minister David Cameron asked the country to vote on its membership of the European Union. At the time, this was seen as a distraction or a minor issue that would go nowhere. In June that year, the country went to a referendum. At the end of the day, the people voted to leave the EU. This was an unexpected news. This is because the UK was the second biggest economy in the EU after Germany.
After Brexit, came the French election. The final election was between Emmanuel Macron and Marin Le Pen. At the end of the election day, Macron won. However, what was interesting was the amount of votes that Marin Le Pen got. She got 34% of the total votes. Today, France is not at ease. Yesterday, hundreds of thousands of protestors went to the street to protest Macron’s policy of higher fuel taxes. His approval rating has fallen from 50% last year to the current 25%. This means that a populist anti-EU leader could win the next election.
With all these crises, investors were at peace knowing that Angela Merkel of Germany was in power. Last year, Germany went to an election in which she hang by a thread. She formed a coalition this year and later announced that she won’t vie for election again.
The euro is also facing the challenge with Italy, its fourth biggest economy after Germany, UK, and France. The country’s populist leaders are in a war of words with Brussels about budget. An article by Barron’s yesterday said that:
Against this background, it is now important to watch Italy closely. The European Commission has demanded that Italy’s new government, which has vowed to end the country’s economic malaise, revise its budget, curbing spending and shrinking the deficit. But unlike Greece, Italy isn’t a pushover.
Therefore, as a trader, you need to pay a closer attention to the euro and the ongoing developments in the European Union.