Why the euro may rise with the dollar even at lower interest rates

José Manuel Barroso, President of the European Commission, received Aníbal Cavaco Silva, President of Portugal. Discussions focused on the economic situation in Portugal and in Europe, and the progress achieved by the Economic Adjustment Programme. Aníbal Cavaco Silva thanked the President for his efforts in supporting Portugal in its endeavours to overcome the economic crisis. (EC Audiovisual Services, 13/06/2013).

Goldman Sachs, the US financial giant, may be right in predicting more expensive euro parities with the American dollar around 1.37 within six months, largely higher than the current levels of 1.28-1.30.  The European Sting has been pointing for a long time to Eurozone’s foreign account surpluses and the standard inflows of investments into the euro area, which constitute a solid base for the single European money in relation to the dollar and the rest of major currencies of the world. Let’s follow the political and financial issues that determine the foreign value of the euro.

Portugal

Eurozone countries have demonstrated a strong built-in ability to overcome their internal political crisis as the recent developments in Greece and Portugal proved, after Italy has shown it can always come up with viable political solutions. Yesterday Pedro Passos Coelho, Prime minister of Portugal, announced that  Paulo Portas, leader of the conservative CDS party, a junior partner in the government coalition, is to become vice premier. Portas quitted as minister of Foreign affairs last week, thus threatening the Parliamentary base of the government and giving the shivers all around Eurozone. Now he returns to the government as part of an agreement with Coelho’s Social Democrats, to keep alive the governing coalition and avoid early elections.

Actually Portas will undertake the responsibility of bargaining with the country’s official creditors/auditors. Portugal like Greece and Ireland apply severe austerity programmes drafted by the troika of creditors/auditors formed by the European Commission, the European Central Bank and the International Monetary Fund. Portugal is more or less successful in controlling its deficits and public debts but at a great social and economic cost. Unemployment and GDP losses have hit the ceiling but the overall status of the country’s economy is not as discouraging as in Greece. Actually financial market analysts expected Lisbon to return to debt markets early next year.

With Portas in the negotiation table the troika will find it very difficult to deny some relaxation of austerity measures. Portas quitted his position as Foreign Minister, when the Coelho appointed a new minister of Finance known for supporting pro-austerity policies. Now Portas will sidestep the minister of Finance and deal himself with the troika. However, Eurozone’s beleaguered governments even at moments of internal crisis seem to look towards Brussels for advice.

Brussels advice

Last Wednesday, at the peak of the Portuguese crisis, the President of the European Commission Manuel Barroso, an ex-Prime Minister of Portugal himself, issued a strong statement on his country’s political situation saying that: “The initial reaction of the markets shows the obvious risk that the financial credibility recently built up by Portugal could be jeopardized by the current political instability. If this happens it would be especially damaging for the Portuguese people, particularly as there were already preliminary signs of economic recovery. This delicate situation requires a great sense of responsibility from all political forces and leaders. The political situation should be clarified as soon as possible. We trust that Portuguese democracy will deliver a solution ensuring that the sacrifices the Portuguese people have made until now will not have been in vain”.

In short Barroso told his fellow Portuguese politicians that they didn’t have much time to resolve the dead-end they created themselves, because the financial markets are becoming restless about Portugal. It’s noticeable that the political solution found in Lisbon had to be announced before markets open this Monday morning.

Greece

Political developments in Greece followed a similar pattern recently. The left DHMAR party, young partner in the Athens tri-partite government left the coalition two weeks ago. Soon however Prime Minister Antonis Samaras, leader of the centre right New Democracy party, managed to come on top of the situation and quickly reshuffled his government. He gave more powers to the second government coalition party, the socialist PASOK under its leader Evagelos Venizelos, an old fox of the Greek political scenery during the last twenty years. Samaras also managed to attract to New Democracy two independent deputies, thus strengthening his Parliamentary majority. Now Athens is about to strike an agreement with the same troika of creditors/auditors; apparently meant to relax a bit the traumatic austerity policies followed in Greece for four years now.

The ECB

Last but not least, the European Central Bank’s Governing Council in a historic unanimous decision announced last week that it “will keep its interest rates at their current or lower levels for as long as it is needed”. Now the basic rate of ECB is already at record low levels with 0.5%. This ECB announcement is tantamount of the central bank’s taking part in the effort to revive Eurozone’s economy. The target is to support the business sector and the governments with a bonanza of cheap loans.

The fact that the decision was unanimous means that Germany is gradually playing down its austerity policies and accepts the social realities in the south part of the single money zone. In this way there is every indication that Eurozone will follow from now on growth enhancing policies. This is why Goldman Sachs’s prediction may come true despite the fact that ECB says it may reduce its interest rate at levels very close to zero.

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