View the article online at http://citywire.co.uk/money/article/a595780
Euro battle to be waged in Spain, but decided in Germany
More than any other country it is Germany that has the power to decide the fate of the eurozone, argues Chris Towner of HiFX.
In the words of the Spanish finance minister, the battle for the euro will be waged in Spain.
The European sovereign debt crisis has arguably now reached a too big to bail, too big to fail stage. The crisis is deep enough that US president Barack Obama no longer sends his treasury secretary over, but needs to deal with it himself, especially as the chill European winds are starting to blow over the US economy.
The US dollar is seen as the liquid safe haven while this all goes on, as investors clear their decks of the overvalued 'commodity currencies' and Japan and Switzerland continue to stand in the way of allowing their currencies to appreciate further.
Would more stimulus achieve anything?
In terms of monetary policy the central banks have little room for manoeuvre. Interest rates are already at very stimulating levels, and on top of this bond yields in the UK, US and Germany are already at historically low levels, and therefore further quantitative easing and buying more bonds would probably be ineffective.
Indeed, at their last meeting the European Central Bank (ECB) left interest rates on hold. However, they did discuss cutting rates and certainly have left the door open if this crisis intensifies. But the reality is that this crisis has now got to the stage where further monetary easing becomes ineffectual.
In fact ECB chief Mario Draghi in his press conference did point out that most of the problems have nothing to do with monetary policy, strongly hinting that the leaders need to put together a solid action plan.
Although the EU is unified by a single currency, it is far from unified by borrowing and leadership. A clear road map would certainly give clarity and direction to where the EU is going and thus prevent speculators from taking advantage of the fear and uncertainty that exists at the moment.
Germany holds the key
As for Germany, the splendour of their situation in terms of record lows in unemployment and borrowing costs, a competitive currency, and a better chance than England at winning the European Cup are all perfectly apparent.
However, the tables are now being turned with international pressure on the country mounting. Germany is being forced into a corner. It is Germany that will need to start to give up if it wants Europe to become more unified.
The Spanish finance minister is right to say that the battle for the euro will be waged in Spain, but it will be decided in Germany. There has been a lot of talk about the end of the Euro, but it is very much integrated into life now. In fact, it has recently become a teenager. It is now at the age where clear direction and planning is required.
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