Euro: Can the ECB Make Conditions Even Worse for the Currency?

While there is an extraordinarily busy economic docket for the euro over the coming week, these events can be accounted and prepared for. The same cannot be said for the wavering level of confidence among international investors for the regional economy. There are many reasons to doubt the strength of the Euro Zone and its currency; but the most politicized and media-hyped peril is Greece’s burgeoning budget deficit. The Greek Finance Minister has repeatedly assured the market that the government was taking the necessary steps to reduce its budget shortfall and they were not seeking a bailout from the European Union nor trying to sell debt to capital-rich countries like China. At the same time, the EU has repeatedly warned Greek that it was not doing enough to meet its goals to bring its deficit back within the limit within their time frame. Perhaps more disconcerting is the suggestion by EU Economic and Monetary Affairs Commissioner Almunia that there is no “plan B” for Greece and that “in the euro area, default does not exist.” If the economy cannot meet the group’s strict rules and the nation’s neighbors do not provide assistance, something will have to give. Whether that means a bailout (that spreads the pain) or a defection from the euro (which throws the stability of the currency into immediate doubt); the outlook for the currency is not bright. What’s more, Greece isn’t the only troubled EU member. Ireland, Spain, Portugal, Italy and many others are feeling the pain.

Where the euro finds some reprieve from the tumultuous seas that surround the health of its individual members and whole, there will be plenty of scheduled event risk that could generate volatility or add a fundamental aspect to sentiment concerns. Looking over the calendar, the ECB rate decision is top event risk. However, there is a very low probability that the market will be able to draw enough from the event to alter the time table for an eventual return of rate hikes. This past week, ECB member Mersch remarked that the group would not likely discuss altering policy until the March meeting. Fundamentally, there is little to encourage a near-term rate hike. Inflation pressures are muted, the economic outlook is tepid and policy officials realize that raising rates too early can turn a difficult recovery for many members into an impossible one.  Other economic readings will be several steps down in terms of economic impact. Factory and service activity indicator, retail sales and trade figures are all second or third tier indicators. – JK