The Euro may have rightly earned its default position of strength and power that is so frequently actively and passively attributed to it when discussing Brexit. One of the principal arguments for forming a monetary Union is security, risk sharing and solidarity. When FX markets must move so freely in developed economies, why not band together and dampen the short and long term volatility that classic national currencies face. For example, whereas the general election and Brexit referendum brought havoc to the Pound, the Euro barely moved in the face of a peppering of high salience national elections.
The argument in a bubble works beautifully, one would eventually arrive at the partial conclusion that Mundell did as early as the 1950s: the ideal currency area is the world! However, just as the Canadian economist conditioned and constrained his conclusion and reductio ad absurdum, so too will I.
The argument works so long as one continues to view the equation from the point of view of the exception; the implicated (troubled or flourishing) member state. As soon as one considers the equation for the group, there remains the inescapable propensity for defection and the success of a populist desire to secede. Particularly when one includes politics, we are all too aware that national desire can turn on a sixpence.
If a downturn was protracted, for example, it is easy to see how either the concerned member state or the surrounding block could grow tired of the afflicted state’s incorporation within the group.
Now though, with the survival of French, German (just), Dutch and Italian (so far) elections, the Euro is standing tall and potentially earning its widespread buy rating and standing as an emerging principal safe haven currency. The concept of disunity within the single currency is being discussed far less, lending weight to the market’s sanguine evaluation of the Euro. This morning, the Euro threatened 1.23 against the Dollar once again, following a week long bearish trend for the EURUSD cross.
Discussion and Analysis by Charles Porter
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