A Rapid Fall In The Euro Is Needed To Save The Eurozone

For the last two years I have posited the idea that a large decline in the euro is necessary to increase the competitiveness of the export economies of the weaker eurozone members. Barron’s jumped on board this idea two weeks ago and now this morning economist Martin Feldstein is out with an excellent piece in the FT:

...A lower value of the euro would reduce the prices of eurozone exports and raise the cost of imports, reducing or eliminating the current account deficits of the peripheral European countries, since about half of their trade is with countries outside the eurozone. The weaker euro would also boost Germany’s net exports, raise German wages and prices and reduce the trade imbalance within the eurozone.

The increase in peripheral country net exports would also raise their gross domestic product and so reverse their recessions that were caused by higher taxes and cuts in government spending. That would make it politically easier to achieve the needed fiscal consolidations. And shifting from recession to growth would raise business incomes and employment, reducing the volume of bad loans and mortgage defaults now hurting the banks.

How to ensure this rapid decline in the euro (EUR/USD and FXE) takes place?

...The decline of the euro can therefore occur without specific action by the European Central Bank. But a further shift by the ECB toward a looser monetary policy would speed the euro’s decline.

Get ready for more policy actions by the ECB and the potential for the so called “armada” of ECB policy responses (more LTROs, lower collateral requirements, rate cuts to zero, and QE-style asset purchases), which the IMF recently strongly advocated, has greatly increased in recent weeks. A pairs trade such as long VGK/short SPY might be a perfect contrarian idea with an excellent risk/reward in the event that the ECB does ease aggressively and manages to pull the eurozone back from the brink.

Disclosure: Robert Sinn is a professional trader and macroeconomic/market analyst who focuses on multiple asset classes including equities, futures, options and currencies. Robert also has a niche expertise in the precious metals mining/junior mining sectors. He integrates fundamental and technical analysis.

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