Economists and analysts around the world claim that since the start of 2010, when the Greek debt crisis emerged, the euro-zone is in danger and the single European currency, the Euro, is under constant threat of collapse.
In early 2010, Greece experienced serious financial problems and the European Union provided a bailout package to the country. Many economists predicted a serious financial crisis in the euro-zone and collapse of the Euro.
In November 2010, Ireland had the same experience, accepting a bailout from the EU to save its private banks and once again a chorus of analysts claimed that the Euro could vanish within months. However, Forex traders around the globe continue to show confidence in the Euro and no one is preparing to abandon trading the Euro.
First of all, when you hear the President of the European Union, Herman Van Rompuy, speaking in the news of a possible collapse of the euro-zone if it fails to overcome the debt crisis, you should be aware that you are listening to a politician, not the President of the European Central Bank, for instance.
Second, hedge funds continuously bet on a weakening Euro rate but in the past year the single currency bravely gained against most of its major counterparts like the US dollar, the British pound and the Japanese yen.
Of course, the Forex market is very volatile and currencies gain and lose in value all the time, however, the Euro is backed by the second-largest developed world market and successfully competes with the US dollar to become the world's preferred reserve currency. In other words, a debt crisis in Greece, Ireland or possibly Portugal cannot lead to collapse of the Euro the same way a debt crisis in California cannot ruin the US dollar.
A greater danger is affiliated with the "fear of speculators", as Martin Krugman describes it. It means that the foreign exchange markets are increasingly driven by market moods and expectations resulting in economic policy influenced by sentiment in the financial sector instead of decision driven by pure logic.
However, the Euro managed to survive many small and big crises since its introduction in 2000. The initial EUR/USD exchange rate stood at USD 1.17, then decreased to USD 0.82 within a year, and strengthened to USD 1.60 in mid-2008 when the global financial crisis began. There is no fundamental or other reason for the Euro not to survive the present euro-zone debt crisis as well.
Financial speculators often bet against the weakest currencies and weakest countries within a trade or currency union. On the other hand, the European Central Bank constantly sends signals that it will bailout any euro-zone country running a high deficit and will support the Euro. Some economists argue that this is not a good approach because it encourages governments not to stick to the Maastricht criteria for budget deficits but in fact the ECB is in the strong position to discourage speculators by simply announcing that it will guarantee Greek or Irish government bonds.
Obviously, the Euro is under pressure and this process will continue in short-term but you can hardly find a serious market player who believes that the death of the Euro will be announced anytime soon.
In early 2010, Greece experienced serious financial problems and the European Union provided a bailout package to the country. Many economists predicted a serious financial crisis in the euro-zone and collapse of the Euro.
In November 2010, Ireland had the same experience, accepting a bailout from the EU to save its private banks and once again a chorus of analysts claimed that the Euro could vanish within months. However, Forex traders around the globe continue to show confidence in the Euro and no one is preparing to abandon trading the Euro.
First of all, when you hear the President of the European Union, Herman Van Rompuy, speaking in the news of a possible collapse of the euro-zone if it fails to overcome the debt crisis, you should be aware that you are listening to a politician, not the President of the European Central Bank, for instance.
Second, hedge funds continuously bet on a weakening Euro rate but in the past year the single currency bravely gained against most of its major counterparts like the US dollar, the British pound and the Japanese yen.
Of course, the Forex market is very volatile and currencies gain and lose in value all the time, however, the Euro is backed by the second-largest developed world market and successfully competes with the US dollar to become the world's preferred reserve currency. In other words, a debt crisis in Greece, Ireland or possibly Portugal cannot lead to collapse of the Euro the same way a debt crisis in California cannot ruin the US dollar.
A greater danger is affiliated with the "fear of speculators", as Martin Krugman describes it. It means that the foreign exchange markets are increasingly driven by market moods and expectations resulting in economic policy influenced by sentiment in the financial sector instead of decision driven by pure logic.
However, the Euro managed to survive many small and big crises since its introduction in 2000. The initial EUR/USD exchange rate stood at USD 1.17, then decreased to USD 0.82 within a year, and strengthened to USD 1.60 in mid-2008 when the global financial crisis began. There is no fundamental or other reason for the Euro not to survive the present euro-zone debt crisis as well.
Financial speculators often bet against the weakest currencies and weakest countries within a trade or currency union. On the other hand, the European Central Bank constantly sends signals that it will bailout any euro-zone country running a high deficit and will support the Euro. Some economists argue that this is not a good approach because it encourages governments not to stick to the Maastricht criteria for budget deficits but in fact the ECB is in the strong position to discourage speculators by simply announcing that it will guarantee Greek or Irish government bonds.
Obviously, the Euro is under pressure and this process will continue in short-term but you can hardly find a serious market player who believes that the death of the Euro will be announced anytime soon.
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