By: Dr. Mike Campbell
The Euro has been doing a very fair impression of a yoyo in recent months. The downswings happen whenever markets react badly to news on the national level, pushing government bond yields higher and the Euro lower. In the absence of news, speculators gradually push the currency higher. A major upswing happens when leaders get together and promise decisive action. The last of these upswings happened when EU leaders agreed to push the EFSF towards the €1 trillion mark and to provide further support to Greece. It was a short-lived rally which was brought crashing down when the Greek government suggested that a referendum would be needed to gain public approval for the deal.
The move, that we reported on yesterday, by major central banks to make borrowing easier has pushed the Euro higher against the Yen and the Dollar – the mechanism kicks-in on Monday. In the interim, the new president of the ECB, Mario Draghi, has suggested that the bank will be more robust in its actions to support the Eurozone. This style of message usually pushes the currency higher until the scope of the action disappoints and it falls back. However, politicians in Europe and further afield do seem to have woken up to the fact that decisive measures need to be taken now.
Draghi told the European Parliament that stronger deficit and debt rules for the Eurozone would help to restore confidence in the Euro. "What I believe our economic and monetary union needs is a new fiscal compact - a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made," Mr Draghi said.
His comments were made prior to separate, key speeches by the German Chancellor and the French President which called for closer fiscal union within the 17 Eurozone nations.
The sovereign debt crisis will abate when confidence is returned to the markets. The colossal debt mountains will not disappear overnight, but just like you or me taking on a large mortgage, the idea is that the debt can be paid down over time – driving up the yield on government bonds issued by highly indebted nations will continue to fuel the current crisis just as surely as hiking the mortgage rate is bound to lead to more foreclosures.