The euro crisis makes for great political drama – after all, markets and media hinge on the words of central bankers and politicians nearly every day, assessing how they seem to be getting along.When ECB president Mario Draghi, for example, said in July that the central bank was ready to do “whatever it takes to preserve the euro,” he lit up a market rally that kept on going even after he delivered a bond-buying plan supposed to do just that a month later.
But there’s a catch, and we raised this issue yesterday: the reality on the ground right now in the fragile euro periphery is simply quite different, and it’s out of the hands of Mario Draghi and the ECB.
Spain and Greece are engulfed in violent protests this week as citizens lash out against austerity measures in the streets.
Spain’s biggest and most important region, Catalonia, is now threatening to secede from the country over the controversial economic reforms.
Greece is desperately trying to find more things slash from its budget as the day-to-day reality on the ground there becomes even more heartbreaking.
Even Portugal, a country that mostly avoids crisis headlines these days, faced massive protests over austerity last week.
And this has all been on the calendar.
So, where’s the disconnect?
Spain’s release of the details of its 2013 budget today is a perfect example of where to find it. The budget is constructed around the assumption that Spain’s economic output will decline only 0.5 per cent next year. But, as many analysts point out, that assumption is wildly unrealistic.
And if those assumptions don’t play out, there’s no one standing by to save Spain. Not the ECB. Not Germany. Not the IMF. No one.
Société Générale’s global head of foreign exchange strategy Kit Juckes points out that this is the one thing everyone always seems to forget about the crisis when it looks like central bankers are finally coming to the rescue.
In a note to clients, he writes:
Spanish and Greek protests have made headlines and are a reminder that all the ECB’s money won’t make recession go away and until a growth strategy is implemented by Europe’s politicians, this crisis can’t be brought to a satisfactory end. The FX market is trying to do its bit, selling the euro, and the 200-day EUR/USD moving average at 1.2830 remains the gateway to fresh softness. I like EUR/USD and EUR/GBP shorts.
European officials are still playing along, too. European Commission VP Olli Rehn said in a statement today that Spain’s new budget exceeded all expectations of the EU. But again, it’s all based on completely unrealistic assumptions about growth that probably won’t materialise.
And that means the crisis in Europe will continue – so get used to a few more spells of euro fatigue in the coming months.
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