In many cultures the 21st birthday is a significant milestone in an individual’s crossover into adulthood and responsibility. In the US it is the official legal age when you can go into a bar and drink alcohol, while in South Africa it is traditional to be presented with a key made of gold, silver or aluminium to represent a coming of age.
In parts of Europe it is also significant, with the Netherlands being a “crown” year, where the person gets treated like royalty, and a chair is suitably adorned at the dining table. Other ornate affairs include the Philippines when males turn 21, a big party is thrown to mark the event, while in the UK turning 21 was traditionally the age that men would become a knight.
Either way, and however it is celebrated or marked, the 21st birthday has been traditionally perceived as the official passing of adolescence into the responsibility of standing on your own two feet and being an adult, with all the responsibilities that go with that.
While its significance has been diluted in recent years as the importance of 16th and 18th birthdays has increased, most people tend to have some memory of their 21st birthday, even if their memory tends to be stronger with respect to how they felt the day after.
Why, you may ask is this important, with respect to the euro? Next year the euro turns 21, having come into existence in January 1999, and traditionally 21st birthdays tend to be viewed as the gateway to adulthood, a great responsibility and maturity as well as waving goodbye to the many growing pains of being a teenager.
Unfortunately for the euro, 21 years on from the fanfare of its launch, and its ambition to take on the US dollar as a reserve currency, it remains far from mature and hasn’t even come close to challenging the US dollar’s dominance in global financial markets.
If a catalyst were needed for this dominance to increase it was the election of Donald Trump in 2016 as president of the US, and his willingness to weaponise the US dollar’s role in global finance to allow the US to get its way in terms of foreign policy, as well as financial markets regulation.
Thus far EU leaders have done little to correct the inherent flaws in the construction of the single currency, flaws that are contrary to departing EU commission president Jean Claude Juncker’s assertion that the euro had become a symbol of unity, sovereignty and stability. Sadly the euro is anything but a stable construct, and is still undergoing significant growing pains.
Even the European Central Bank was at it, claiming that support for the euro was strong and that 75% of EU citizens in the euro area were in favour of the single currency. While not wishing to dispute those numbers, these types of self-congratulatory statements probably seem rather hollow to the millions of unemployed people both old and young in southern Europe, who want something more than soundbites from their elected politicians. Sadly, statements such as these are all too typical of the myopia surrounding EU policymakers as they continue to show little appetite for the types of reforms needed to make the euro work like a proper currency zone should.
With the willingness of the US to use the US dollar as another lever in its foreign and trade policy, and the slow emergence of China as a key player in global financial markets, it has never been more important for EU policymakers to shore up confidence in the euro. To that end the European Commission has been looking at how best to use the euro to protect European companies and trade, from the dominance of the US dollar.
Sadly this isn’t a new problem for Europe. As far back as the 1970s there has been concern about the heavily weighted role the US dollar plays in international finance.
In 2008 the EU leaders thought their time had finally come when a massive easing program on the part of the US Federal Reserve saw mass inflows into the euro, and out of the greenback, as some started to predict the demise of the US dollar.
Unfortunately for the euro, while EU leaders were cackling from the side-lines about the hubris of Anglo Saxon finance, the financial crisis only served to shine a light on its own flaws in the lead up to the 2008 crisis, and which came home to roost in 2012, when the euro nearly came apart under the weight of its own contradictions.
Only a timely intervention by new ECB president Mario Draghi saved the currency when he made the now infamous “whatever it takes” speech in London.
Now eight years on, while no one questions the intentions of the European Central Banks determination to defend the euro, it now appears to be reaching the limits of its mandate, in the absence of any desire on the part of EU leaders to reform the structure on which the currency sits.
As a result of this reluctance to reform the currency’s fiscal framework, there has been a reluctance on the part of international investors to use the euro in preference to the greenback, meaning that despite being in use for coming up to 21 years it only accounts for about 20% of global foreign exchange reserves, compared with 50% for US dollars.
That still makes it the second most used currency in the world, but until it irons out its flaws, of having 19 different countries using the same interest rate, without a single fiscal policy, it will continue to have doubts cast upon its sustainability. This would require EU leaders to force closer economic integration in a period where populism is rising and more and more people are unhappy about the effects of globalisation.
Another problem EU leaders need to deal with is the precarious nature of the European banking system as it wrestles with the challenges of negative rates. The current state of Deutsche Bank is it wrestles with survival is testament to this.
The rise of populism across the bloc is set to be an enormous challenge, a rise that came about as a result of the limitations of governance for countries like Greece, Italy and Spain when crises hit their economies, while in France the “gilets jaunes” are presenting a huge challenge to Emmanuel Macron. With no single political authority or Treasury, the euro is likely to continue to cause difficulties, particularly when it comes to driving reform, something which a number of EU politicians have belatedly started to acknowledge, but have thus far been completely unable to deliver.
The appointment of Christine Lagarde as European Central Bank President appears to be part and parcel of a new strategy to help drive closer fiscal integration, however even before she took up her post battle lines were being drawn by France, Germany and the Netherlands on the harmonisation front. It is already becoming apparent that the policy of negative rates is causing more harm than good, and as such the European Central Bank will need to be ultra-creative to nudge further reform. There has been talk of fiscal stimulus with Germany best placed to deliver it, however even here the bar to doing it remains high, with the black zero balanced budget rule written into the German constitution.
The European economy was already slowing at the beginning of this year and while we’ve seen some signs of a pickup as we head towards year end, economic activity remains weak. As things stand interest rates in the euro area are unlikely to go up anytime soon, and with trade concerns likely to weigh on economic activity in 2020, the only silver lining could come from a green revolution, however any adjustment is likely to be slow and painful.
Unless we get an economic pickup in 2020 then the stagnation in Europe could well continue further as Europe starts to turn increasingly Japanese, in terms of deflation, and slow to subpar growth. While Japan has managed to cope with 30 years of below 2% inflation, and weak demographics, Europe is not Japan. Quite simply the euro should have grown up by now and while very few expect it to come apart at the seams, there is a risk in the absence of some significant reforms that it will struggle to even get close to the US dollar in the years ahead, unless doubts about its sustainability are put to bed once and for all.
In terms of monetary policy the ECB is already close to the lower bound given concerns about the effects of negative rates. That doesn’t mean that rates can’t go much lower, or the ECB can’t do more QE, despite the prospect of lower US rates, but it does limit the upside. Some 10 years on from the financial crisis and there is still no banking union no treaty on the European Stability Mechanism. The euro is ill-equipped for the next crisis, and when it comes it could get ugly.
We currently have solid resistance at 1.1170 where we have the 200-day MA, and while below this key level the risk remains tilted towards 1.0800 and 1.0500 over the year ahead. A move above 1.1200 retargets the 2019 highs at 1.1550.
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