finder-The recent election of Emmanuel Macron as France’s new president has renewed speculation over the future direction for the euro. With Macron leading the country, fears of France emulating Britain’s “Brexit” and leaving the European Union (EU) – an idea some commentators nicknamed “Frexit” – have subsided.
But with those concerns allayed, structural problems affecting the euro and eurozone will need to be addressed. ForexTime research analyst Lukman Otunuga says the euro is bearish against the US dollar.
“With Emmanuel Macron’s victory in the election dealing a symbolic blow to populism and quelling fears of ‘Frexit’, investors have redirected their attention towards macro-economics in Europe,” Otunuga said.
“The overall data from Europe in recent months has displayed a touch of resilience and it will be interesting to see how the improving macro-fundamentals and Macron’s victory impact the ECB meeting in June. Euro bulls seem to be back in town with a vulnerable dollar fuelling the upside rally.”
Why does the euro matter?
The euro is the official currency of the eurozone. It is used by 19 of the 28 member countries of the EU. More importantly, it is the second-most traded currency in the world. But having a single currency doesn’t stop country-specific issues.
In 2009, Greece, Ireland and Portugal were particularly affected by the global debt crisis. They required financial assistance from the European Financial Stability Facility (EFSF). Other countries, such as Spain and Italy, also needed to borrow funds over time.
The Cyprus banking crisis developed in March 2013. The Cypriot banks lent money to Greece and when the Greek economy took a dive they bought up Greek government bonds, hoping for a bailout. The banks went broke and as the countries in the eurozone were not willing to save them Cypriots feared the banks were coming after their savings accounts. Cypriots ran to the banks to retrieve their cash.
Was Cyrpus just the tip of the iceberg?
Non-performing loans have been rising steadily in the eurozone’s commercial banking sector. Italy is especially affected by this. Of its 500 banks, 114 are technically insolvent, with bad loans exceeding their entire capital base. The banking sector of Italy has at least €360 billion in bad loans.
To make things worse, the economies of most Mediterranean countries are increasingly non-competitive. Persistent inflation, high unemployment and a lack of credit and investment can be a dangerous cocktail.
Devaluing currencies was once a potential solution, but since the introduction of the euro, this is no longer feasible. Shying away from the euro and returning to separate national currencies would likely see currencies traded at much poorer rate than the euro.