Shorting the Euro

9 February 2010


If anyone thinks that the US debt position is particularly bad, they should take a look at Europe. There is a front page story on today’s Financial Times that positions of 7.6 billion dollars have been taken shorting the Euro. A “short” is a term in finance that essentially means betting that the shorted commodity (which in this case in the Euro) will decrease in value. In other words, major hedge funds and and traders are counting on a fall in the value of the Euro. This speculation is primarily due to an expected debt crisis within the Eurozone. (I previously wrote about the woes of the Euro in Greece in The Dubious Benefits of the Eurozone.) Also today, at the same time that the Financial Times was reporting the massive shorting of the Euro, the BBC ran a story, Euro bounces back against the dollar and pound, that begins, “The euro has strengthened against both the pound and the dollar as currency traders’ fears about European debt levels begin to recede.” The BBC story points out the the Euro has recovered from recent lows, but mentions nothing of the shorting on international currency markets.

Although a currency ought to be understood as one commodity among many, as I have characterized it above, because currencies are tied to political entities (mostly to nation-states, but in the case of the Euro to the EU, which is a quasi-state entity) currency speculation takes on a political edge. Aggressive currency speculation (especially the shorting of a currency) is often perceived as a hostile act taken against the nation-state that generates the currency in question.

Speculation against the Thai Baht was widely credited for triggering the Asian financial crisis of 1997. Currency speculators like George Soros are soft targets, especially given the popular anti-financial sentiment of the present, so it is all-too-easy to ascribe blame to them, but note that I identified currency speculation as the trigger of the crisis. The causes of the crisis are many and reach back further into contemporary history.

Should we expect a European financial crisis to emerge from this massive shorting of the Euro? There may be a “crisis”, but there will be no crisis on the scale of the 1997 Asian financial crisis. Why not? Europe’s fundamentals are strong, and its institutions are robust. Neither could be said of the east Asian “tiger” economies of the 1990s. Moreover, the Euro has been a highly valued currency that has been bid up appreciably in recent years.

The short memory of traders and newspaper columnists militates against their seeing commodity prices in an historical context large enough and long enough to make sense of market fluctuations. I have no doubt that if the Euro plunged in ten percent of its value, this would be received with much wailing and gnashing of teeth in the financial press. But let us put this in perspective. The Euro is currently trading around $1.38296. A ten percent decrease would value the Euro around $1.24466. But as recently as June 2001 the Euro was only worth about 85 cents. A Euro devalued by ten percent would still be about forty cents higher than its low point in June 2001.

After the initial release of the Euro, its value steadily declined against the dollar for a couple of years. Its present high valuation has been the result of nine years of accumulated appreciation. At that rate, the Euro could afford to lose some value. A decline in the value of the Euro would be a major boost to Eurozone economies as their products would suddenly be much more affordable in major consumer markets like the US.

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Poor Cousins

What would a rump Eurozone look like?

The Economic Future of Europe

An Alternative to the Euro

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Grand Strategy Annex

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