In a note out this morning, Citi’s FX guru Steven Englander predicts that tomorrow’s EU Summit will probably be a disappointment, but that it won’t be so bad that it will trigger crisis selling again.
Regardless of the details, however, there is one thing that Europe isn’t paying attention to:
The one area that the European leaders are ignoring, and which will come back to haunt the euro, is growth. Given the fiscal austerity that is being demand of almost every euro zone country, the crowding-in of growth would seem to be an essential element of the policy package that is delivered. The only credible path to growth and euro strength is lower risk premia and lower average interest rates across the euro zone. So far that seems to be low on the priority list. The preferred European policymaker growth recommendation of structural reform can not deliver the growth that is needed in the required time horizon. High rates across much of the euro zone makes debt servicing much harder and slow growth. However much global investors would like to buy euros as an alternative to the USD, that outcome is unlikely, unless it becomes clear that the growth, fiscal and interest rate paths are consistent. So net, net even if the euro relief rally continues when it becomes clear that the there will be no euro zone disaster, the enthusiasm for euro buying is likely to be hobbled until credible growth prospects emerge.
This is spot on.
Yesterday’s Eurozone PMI reports confirmed that the European economy continues to weaken badly, divorcing itself from the US and Chinese paths.
This chart from Markit comparing the PMIs with GDP tells you all you need to know:
Nouriel Roubini has been out making the same comments lately, warning about the lack of growth ideas, and even Merkel recently said something about how growth was the ultimate solution to the debt crisis, which is totally spot on: growth has always been the only way sovereigns overcome their debt issues.