European finances are without doubt in a parlous situation, with countries like Greece and Italy saddled with mountains of debt. The US is in a similar position and it’s solution is to print it’s way out by ultimately devaluing the USD. The European solution, led by German fiscal responsibility, is to put rules in place to ensure the profligacy doesn’t be repeated, and move forward from there. The financial markets prefer the US solution, because then it can take it’s sliver of every new dollar created; fiscal responsibility doesn’t help generate large bonuses.
The UK PM’s stance seems strange to me in many ways. His government has been following a path of fiscal responsibility yet he fought the treaty changes to gain some cheap political points at home. The other EU members can still carry out the regulatory reforms which he so fears, ending up with the same impact on the UK financial services industry.
The European solution is obviously a process and cannot be considered a success or a failure on any one day. What is becoming clear to me, is that if the EZ are successful in stabilising the EUR and in implementing its fiscal responsibility, the EUR /USD will move onto a much higher plane in the long term. The US will keep printing, which will erode its reserve currency status (which will ultimately be very good for the broader US economy, but that’s another story). If the EUR can create a stable base from which to move forward, then the EUR/USD will eventually rise.
Lot of ifs and maybes in there, the state of the European banks is still a worry and the financial market seems desperate for the EZ to fail, so we can expect plenty of volatility over the coming months. If we are still trading above 1.30 by the end of January, then I’ll be willing to start placing my long-term bets.