Friendship Highway

If it ain’t broke… Fix it.

That’s certainly been the message and driver of the European Union (or its predecessors, the previously unbroken European Economic Community, or functioning European Coal and Steel Community). This observation, be it a criticism or a compliment, can’t be levied at the EU exclusively: everything human, perhaps even living, with infrequent exception has a desire to expand its capacities and improve. In the case of the European continent’s most ambitious project, this pervasion and growth, whether positive or negative, has been strongly felt.

Created for the purpose of making war on the continent (already observed twice in the space of a half century at the time of its conception), not only materially impossible but unthinkable, the EU has developed into a mesmeric (again good or bad) volume of common rules, an organised economic force and, with exceptions, its own monetary union. Growing from a collection of just six nations, with only two conflicting hegemons at its centre, the Union now stands at 28 (minus 1). At present, the desire or at least impetus for change and evolution comes from two opposing directions, the south east and France.

Mr. Macron’s proposed set of reforms have been bandied across screens and newspapers even outside of the single currency area. Met with a reaction little shy of sheer ambivalence in Berlin and across much of the Eurozone, the French President’s programme shows little sign of gathering momentum, at least for now. Arguably, the lack of momentum presents a long run risk for the longevity of the Eurozone, however, more of this for another time.

The second, developing and arguably highly salient emerging force for evolution comes from the Balkan states, in particular, the rapidly thawing nation of Macedonia.

Macedonia and its capital Skopje has long since had a clash with the EU, mostly due to its disaffection towards Greece, itself a relatively new member of the Union. Amidst a strong narrative for the accession of Balkan states into the Union, despite their largely and explicitly communist market structures following the dissolution of the former Yugoslav Republic, the international perception of the bloc is imperative. As a consequence, we await to see how a relatively minor set of concessions and gestures towards the Union, and in particular towards Greece, are to be interpreted.

The renaming of an airport and main road into the City might do little to sway the perceptions of the state from the incumbent EU member, Greece, that currently vetos their accession bid to the (less and less) exclusive club. It’s true, dropping the name of notorious warrior and invader, Alexander the Great, from the airport banner might not lead to an immediate flurry of thanks from Athens. Similarly, the somewhat cringeworthy name of Friendship Highway painted over Alexander’s own might trigger a somewhat different and involuntary bodily function than the intellectual reaction of forgiveness and concession building. But, hey, baby steps!

Following a European Sovereign Debt crisis accentuated by the economic differential between peripheral and core member states, the momentum behind accession is not immense. However, the force does remain perceptible, acute and largely internally driven within the Commission, as opposed to emanating from the constituent heads of state in the Council. Successful accession to the group does create significant risks to the single currency, the Euro. Whilst idiosyncratic arrangements could always be bargained for under multilateral and consensus bargaining, the Lisbon treaty explicitly states that all acceding member states must work towards, and accept, eventual membership of the Euro.

In conjunction with Macron’s desire to strengthen and deepen any incumbent economic and political structures within the monetary union, the prospect of widening the union to include additional member states is particularly concerning.

For example, President Macron’s vision of the Eurozone includes a highly distributive component: a monetary and fiscal fund in order to prevent the exacerbation and even initial momentum behind another Union-wide downswing. The (largely unjustified yet pervasive) concern of an unrelenting bias towards peripheral states, those with the most severe business cycles and economic fluctuations, would almost certainly be exacerbated. Worse still, if the drain on developed markets during adverse economic conditions were a valid concern, the eventual destruction of the bloc and domestic political instabilities within the Eurozone would be right around the corner.

With two forces for fixing the unbroken operating in such conflictual directions, and in a sequencing that may well ultimately favour expansion over deepening, the long run outlook for the Euro remains cloudy. These unintentionally destructive forces will play a highly significant role in the general direction of the Euro.

Today, and for each day over the past week, the Euro has remained highly stable. In fact, only public comments from ECB President Mario Draghi were able to move the single currency more than 0.2% on an intraday basis. Against a strongly appreciating Dollar, EURUSD dropped through 1.20 last Wednesday. The Euro is almost certainly on a cyclical downswing, however, remains at a confident level. Against the Pound, the Euro has traded at around 1.1425 this morning. Today, a considerable risk to the Euro will emanate from Italy as Berlusconi suggested he will not stand in the way of a populist Five Star – the League coalition that could be publicised within the next 24 hours.

 

 

Discussion and Analysis by Charles Porter

 

 

Click Here to Subscribe to the SGM-FX Newsletter