We are all witnessing today very strong activities on the monetary markets and an unprecedented appreciation of the Euro versus the Dollar.
Is this situation to stay? To answer this question, one must look at the current macro situation of our economies. The US FED has started an inflationary policy in an effort to deal with a series of urgent issues. The first is related to the job market where almost 17% of active Americans are either jobless or work on a part-time basis. The second is linked to the junk credits inherited from the real estate market and that were partly responsible for the world financial crisis. Those junk credits will simply never be reimbursed by any “regular” channels. Indeed, since no one had forecasted the magnitude of the problem, there were no organization put into place that had been foreseen to be in a position to act in case of a major failure such as the one we encountered. It will be therefore for the US Government to tackle that issue, by reimbursing those junk credits, and those are not small amounts. On an international level, one must note that other developing countries, since September 21st, that are known commercial partners with the USA, have also launched strategies of inflationary policies in order to keep the level of the exports aligned with the dollar therefore maintaining a lower level of their currencies. With the exception of China, another example is the one of Japan that intervened drastically on September 15th. , purchasing more than $ 25 billion on the exchange market. The reaction of the European Central Bank has been very different. The ECB decided pretty much to do nothing and did purchase very low levels of sovereign bounds recently. In effect, the ECB seems to believe that at a macro-economic level the European economy is not doing that bad with respect to the growth levels showed by a limited number of European countries such as the one of Germany that represent 35% of the European GDP. If we take a further example of the Gas consumption levels, the one of Europe increased by 10%, when it increased by 16% in Germany on the first semester of 2010 compared to the one of 2009. As a consequence, if the ECB was to over-evaluate the Euro, this could have catastrophic consequences since no countries apart from Germany and the Netherlands could be in a position to sustain such as situation. The result of such a behavior would be an immediate increase of unemployment that is not sustainable given Europe today’s unemployment rates and forecasts. Furthermore, the consequences of an over-evaluated Euro could simply be the destruction of the Euro zone. However, the position of the ECB might not be a sustainable one: the structural difficulties the Euro are linked to the crisis of public financing such as the ones of Greece, Ireland or Portugal and they are lasting. There are other fragile economies in Europe such as Italy or Spain that require a thorough monitoring. France situation is most likely to become central point at the time of the upcoming Presidential elections in 2012.