Investors may decide to let the euro live

By Edward Hadas
December 8, 2011

By Edward Hadas
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Speculators can make a fortune by making the highly likely become inevitable. In 1992, George Soros made one billion pounds by pushing the UK out of a fixed exchange rate it was not willing to maintain. Investors betting that the euro will break up may want to repeat the Soros accomplishment.

The path is simple. First they take advantage of their power to reduce any heavily indebted euro zone country to insolvency by increasing rates and refusing to renew loans. Countries then default and the European Central Bank and European monetary union fall under the strain.

But only Greece has buckled, and a weak tax system meant it was almost certainly heading to insolvency anyway. Everyone else is showing more political will than sceptics anticipated. No government has wavered in its commitment to holding the euro together in a fiscally sound way and the European Central Bank has done what was required to keep the pressure bearable.

Many investors have been surprised by this resilience. But they should have studied the decades of snail-like progress towards full European Union. The leaders of these nations have always left it to the last minute to do no more than was just enough. The new element of the current crisis is not the frustrating behaviour of the authorities but investors’ bleak interpretation of every development.

The news during the last week has followed the same trajectory, but the market’s interpretation has been different – and more optimistic. Bond yields have started to fall. Equities have risen. Even a threatened mass downgrade from Standard & Poor’s did not have much effect.

What has changed? Investors will say that the political commitment to the euro finally looks credible. That is a face saving way of saying, “We read the situation wrong”. But perhaps investors have also realised that breaking the euro was not like breaking a single currency peg. If their ever-escalating demands for austerity and fiscal union lead to a chaotic dissolution of the currency of the world’s second largest economy, they will be held responsible for wrecking the global economy. Better, perhaps, to give governments the benefit of the doubt.

Comments

I dont think that at this point commercial money will be able to break the Euro, the sovereign body has been quite resilient, I must take my hat off to Merkel.
I dont think that commercial money would (Im talking about the 99%) really want to break the Euro, It does not end well in the short, middle or long run. But those at large fund management companies that own their accounts and are free to trade with, not necessarily “inside” information, but “privileged” information such as institutional investors (making allusion to Henry Paulson) have a definite advantage over the market in general. Of course, let’s not forget about all the algorithmic tools and electronic trading super computers to aid them, and of course the brightest minds in terms of economists, analysts, statisticians and lobbyist (and therefore leverage in Capitol Hill) that money can buy.
My point is that if there is anyone out there who wants to break the Euro, that someone is the George Soros who are at the top and can afford to do so and kill the Goose, except that in this case, there is a lot of gold inside the goose.

Posted by Methane | Report as abusive
 

Investors – how kind of you, thank you for ‘allowing’ the Euro to live.

re. Soros in 1992. A totally different situation, Sterling was thrown out of ERM because it was not economically reasonable level to be fixed to the DEM.

Those who bet against the Euro will lose (in the medium term). Make no mistake.

Posted by RiskManager | Report as abusive
 

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