Does the new year signal the twilight moments of the Euro?


Dissent among fiscally conservative British investors and corporations has been widespread with regard to the effect that the European debt crisis has had on the national economy of Britain, and the resultant cost of bankrolling what many regard as a juggernaut.

The first week of 2015 heralds a week in which the share of currency reserves in the euro held by central banks fell to its lowest in over a decade in the third quarter of 2014 at less than 23 percent, according to International Monetary Fund (IMF) data released on December 31, 2014.

According to Reuters, the euro share of IMF reserves totaled $1.4 trillion, or 22.6 percent of the total allocated reserves, down from $1.5 trillion, or 24.1 percent, in the second quarter of 2014. The latest share was the lowest percentage since the third quarter of 2002.

Whilst Britain maintained its sovereign currency, which was a shrewd move for which the proponents of retaining the Sterling fought hard against pro-Euro Brussels which has gained tremendous power in implementing pan-European rulings on a range of aspects of every day life from fiscal policy to law enforcement, often over and above that of national governments within EU member states.

2013 was a crucial year for Euroscepticism, with Cyprus having nationalized two of its major banks, Laiki Bank and Bank of Cyprus, in doing so seizing up to 60% of customer deposits in order to ‘bail in’ the unserviceable debt of the two institutions. This created tremendous anticipation that such a practice may be adopted as a precursor to further bail ins across Europe.

Greece’s ongoing government debt situation in which huge fiscal imbalances developed during the six years from 2004 to 2009, where the output increased in nominal terms by 40%, while central government primary expenditures increased by 87% against an increase of only 31% in tax revenues.

In a government report, the Greek Ministry of Finance states the aim to restore the fiscal balance of the public budget, by implementing permanent real expenditure cuts (meaning expenditures are only allowed to grow 3.8% from 2009 to 2013, which is below the expected inflation at 6.9%), and with overall revenues planned to grow 31.5% from 2009 to 2013, secured not only by new/higher taxes but also by a major reform of the ineffective Tax Collection System.

The reality is that Western European nations continue to bolster Greece’s flagging economic situation, whilst most of Southern Europe including Eurozone nations Spain, Portugal and Greece are in the financial mire with youth unemployment levels up to around 50%, and productivity very low.

France, a once prosperous manufacturing and farming nation, is facing economic collapse. France’s decline is best illustrated by Fortune magazine’s depiction of the rapid deterioration in its foreign trade. In 1999, France sold around 7% of the world’s exports.

Today, the figure is just over 3%, and falling fast. The same high costs that are pounding exports draw an ever rising flow of goods from Germany, China and even southern Europe. Those imports are taking an increasing share of sales from pricier French-made products.

In 2005, France’s trade balance was a positive 0.5% of GDP. Today, it stands at minus 2.7% of national income, meaning imports now far exceed exports, turning trade from a growth-generator into a major drag. An excellent illustration of the competitiveness gap is the chasm between German and French exports to China. Germany sends $70 billion in cars, machine tools and other products to China each year, seven times the figure for France.

Whilst Britain made an incredibly shrewd move in retaining the Sterling, its all-encompassing EU membership is a costly business which is coming under increasing question from British conservatives, concerned about the overspending and inefficiency of the eurozone’s member states which amounts to bail outs and bail ins rather than re-industrialization and roads to prosperity and fiscal independence.

Indeed, the vast majority of interbank financial activity is maintained within London’s institutions, themselves firmly ensconced in Canary Wharf or the Square Mile, bastions of international electronic trading, bearing little relation to the remainder of the nation in which they are hosted.

Could it be that if Britain moves away from the European Union in all but trade agreements, there would be little activity to sustain it and it would be likely to collapse, restoring nations back to national rather than transcontinental currency units?

Global foreign exchange reserves overall fell to $11.8 trillion in 2014, marking the first quarterly drop since the financial crisis in late 2008/early 2009. Global reserves hit a record $12 trillion in the second quarter of 2014.

Global reserves are assets of central banks held in different currencies primarily used to back their liabilities. Central banks have sometimes cooperated in buying and selling official international reserves to influence exchange rates.

“The data indicates that there was no appetite to buy the euro after an 8 percent correction in the third quarter,” said Sebastien Galy, senior foreign exchange analyst at Societe Generale in New York.

Mr. Galy stated to Reuters that foreign reserve managers did not buy the euro in the third quarter since the European Central Bank’s stimulative policy of negative interest rates made it extremely expensive for them to do so. He also said the data suggested the managers may have sold the euro.

“This changes the entire dynamics of euro/dollar,” Galy said. He said the data signaled coming weakness in the euro and that it could hit $1.14 against the greenback in the first quarter of 2015. The euro hit a 4-1/2-year low of $1.2005 on Friday.

The U.S. dollar’s share of reserves rose to 62.3 percent, totaling $3.9 trillion, up from 60.7 percent in the previous quarter and marking the highest share since the last quarter of 2011. The yen’s share was roughly unchanged from the previous quarter at about 4 percent.

Central banks held US$117 billion in the Australian dollar globally as of the third quarter, down from US$121.6 billion in the second quarter of 2014. They held US$118.9 billion in Canadian dollars, down from US$125.2 billion previously.

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Does the new year signal the twilight moments of the Euro?

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