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In a year where the Euro suffered a number of setbacks, 2013 saw the joint currency end the year on a high relative to many of its peers. In particular the single currency ended up against the leading reserve currency, the US dollar. Rather than collapsing as was forecast, it actually ended at a three year peak.

The story of the Eurozone then perhaps does not look as bleak as many had painted it previously. Recovery in Ireland has seen the country exit the bailout program while the much feared collapse of the union has not happened. However the picture is perhaps not as good as you might think. The key issues which resulted in the financial crisis that began in 2010 have not been addressed.

While the Euro has performed well against the dollar, this is as much to do with dollar weakness as it is any strength in the single currency. The Federal Reserve’s quantitative easing program as been instrumental in weakening the greenback against many of its peers. This has been one of the real reasons behind the story for the soaring EUR/USD. Current rumors of imminent ‘Tapering’ of the Federal Reserve’s loan program are already having an impact on valuations.

So what of the underlying economic factors? Is the Eurozone really pulling itself out of the financial mire? The talk of a two speed Europe is very much still on the cards, although even the relatively better off members of the Eurozone are now struggling. Even the mighty German economy has been less than impressive of late, with growth slowing markedly as the global downturn bites. However it is the Southern half of the continent that remains the greatest concern.

The southern member states of the Euro zone are struggling to show the growth needed to pull themselves out of the mire despite harsh austerity measures. Spain and Greece are no nearer to exiting their rescue plans. In fact if the Eurozone begins to slide into deflation then this will actually increase the debt loads on these nations, making additional funds a certain if a collapse is to be averted. Portugal too looks in need of further assistance. Italy, while it has not yet sought bailout funds from the European Central bank, stands perilously close to the brink.

So where does this leave the Euro? Well in terms of policy direction, one option would be for the Central bank to embark on its’ own round of quantitative easing. This would inject much needed free capital in the European economy and might help to kick-start the recovery. It would also help to address any deflationary concerns. It would of course weaken the currency, perhaps significantly if US tapering kicks in later this year as expected. 2014 could prove to be the year of the reality check for the Euro.

Guest Post By Philip Moore of www.londonforexopen.com