Macroscope | Euro set to meet its nemesis in 2017 as ECB’s cheap money runs dry
Fears about asset bubbles forming will only harden Germany’s resolve to stop monetary overkill as soon as possible
One of the burning questions that will vex global investors in 2017 is whether the euro will still be in existence by the end of the year. That may seem a bit of a shocker to comprehend, as the euro enjoys a little year-end short squeeze – but without a doubt the single currency looks set to have an extremely rough ride this year.
A dangerous cocktail of negative factors will prove its undoing this year, its 16th in existence after it was introduced to world financial markets as an accounting currency on January 1, 1999.
But weak economics, dodgy money, bad budgets and ugly politics will all have it in for the euro. Eurozone policymakers will be pushed to the limit to stop the currency going over the edge of a precipice.
It is no surprise European public opinion is splintering and euro scepticism and political populism are on the rise
Despite its year-end flurry, the euro remains perilously poised above parity against the US dollar. A plunge below EURUSD 1.0 should be on the cards early in the New Year.
And it’s not just the dollar on a rampage, but the realisation among global investors that the single currency has been skating on thin ice for far too long and the cracks are starting to spread.
Weak economics remain at the root of the currency’s vulnerability. Germany may be showing some brighter glimmers of life going into 2017, but, outside, most of the euro zone is a zombie economy, kept alive by a surfeit of cheap and easy money from the European Central Bank’s super-stimulus programme. But that’s not going to last forever.
There is no plan to cut back the ECB’s asset-purchase programme just yet, but clearly there are already discussions going on in Frankfurt backrooms to kill QE at some stage.
Germany is at the front of the queue calling time on the ECB’s unprecedented monetisation and the clamour for policy normalisation will intensify, not least because euro zone inflation is staging a comeback.