The key reason why euro's future is uncertain ·CNBC
Michael Ivanovitch
Updated
The need to consider technical aspects of investment options in a currency of an allegedly very uncertain future is a permanent challenge for the euro area portfolio analysis.
In spite of that, the region's political leaders seem oblivious to the widely held view that the common currency (Unknown: EURBA=) is just a flimsy and provisional political structure.
If they understood that reality, their loose talk about the "euro crisis" and the euro's "doubtful long-term viability" would never be uttered, because without their currency the Europeans would not even have a customs union that was laboriously built and implemented ever since the Treaty of Rome came into effect on January 1, 1958.
Indeed, like Caesar's wife, the permanence of the euro should be above any suspicion.
Sadly, the unbearable lightness of the euro area politicians gives no confidence in their resolve to rally around their single currency -- an epochal achievement and a unique symbol of European unity.
Euro leaders, anyone?
The serious and continuing degradation of the political situation in France is the main reason for my euro pessimism. France has been the country that originated and carried most of the policies and institutions designed to bring a hostile and divided continent back together. France, unfortunately, seems in no position to play that noble role anymore.
France is mired in a deep economic and fiscal crisis, and its leader is one of the country's most unpopular acting presidents ever. An opinion poll, published last Saturday (May 30), shows that 77 percent of the French people don't want President François Hollande to run for re-election in 2017. His main rival, the former President Nicholas Sarkozy, fares no better: more than 70 percent of the French would not support his presidential candidacy two years from now.
That leaves Germany's Chancellor Angela Merkel (representing two close center-right parties) alone in a leadership position, despite credibility problems caused by destabilizing spying scandals and a fraying governing coalition with Social Democrats.
It, therefore, should not be surprising that there is no political decision on Greece's legitimate demand to renegotiate unreasonable austerity conditions imposed upon its deeply impoverished population. The French and German leaders seem paralyzed, even though they know that forcing Greece out of the monetary union would spell the end of the euro - with incalculable damages to the European and world economies.
They have been warned about that by the EU Commission President Jean-Claude Juncker in his now famous speech given in Louvain, Belgium on May 5, 2015. Juncker pointed out that Greece's exit from the euro area was "not an option," because that would be an existential threat to the monetary union. He also urged that "we should make sure that everyone understands that the economic and monetary union is irreversible, that the euro is a currency that is here to stay, which is not going to be abolished or suspended. "
Germany wants to save its golden goose
Who will make sure of that? The weakened French and German leaders?
That is apparently what they want to do. During the EU summit in Riga, Latvia, on May 22, 2015, Merkel and Hollande approved a joint document they sent the next day to Juncker with their proposals for a stronger monetary union. The proposed measures are tabled for discussion at the next euro area summit in late June.
The two leaders advocate action on economic policies, economic convergence, investments, fiscal and social issues and stronger euro area governance. Most of these proposals are supposed to be implemented within the existing treaty agreements, but, if necessary, treaty changes to sanction additional sovereignty transfers are not being ruled out.
In fact, Merkel and Hollande are trying to push further an old idea about a core group of EU members. These countries are supposed to lead the integration process, while the rest can join whenever they are ready and willing. The euro area members are supposed to be such a group; they should be moving closer toward a political union to consolidate the management of fiscal, monetary and social policies.
With a quarter of the French electorate voting for the Euro-skeptic Front National, and nearly two-thirds ambivalent with regard to the EU, the official Paris has been quiet about all this. But the German government appears to be more active in promoting closer integration policies. The euro core group is the focus of an op-ed article published by the Vice-Chancellor Sigmar Gabriel in the Bild newspaper last Friday (May 29).
Incidentally, Gabriel's article, calling for a more federal Europe, was published on the day the British Prime Minister David Cameron was visiting Berlin to ask for a looser union and repatriation of some regulations Britain had ceded to Brussels.
I believe that Germany, rather than France, was the moving force behind this latest integration initiative. Germany has a good reason to fear that the entire union - its golden goose -- may begin to unravel as member countries continue to struggle with high unemployment and voters' opposition to the systematic deconstruction of European welfare states.
Berlin seems to have finally realized that economic hardships of its ill-advised austerity policies continue to create ominous political fallout.
Fundamental political changes with the radical left parties taking power in Greece, similar shifts foreshadowed by recent local elections in Spain, an apparently doomed left-wing government in France and Euro-skeptics winning elections in Poland are danger signs for a suddenly vulnerable coalition government in Germany.
Investment thoughts
Germany's economic policies have endangered the monetary union. Further integration - and assorted sovereignty transfers - will be tough to sell to a disillusioned electorate. Any substantive moves to strengthen the euro area institutional framework will most probably have to wait for next French and German elections in May and October 2017.
Meanwhile, the ECB will be holding the fort. So far this year, its policies have brought the euro area equity market up 16.2 percent (compared with a 3.24 percent return on S&P 500), and its massive bond purchases have helped to erase part of the huge losses caused by "lifetime shorts."
The euro area economic recovery is quite slow. A bet on some improvement and rising profit shares in the months ahead seems reasonable. And so does the bet that the euro will remain a legal tender in all of its 19 member countries for the foreseeable future.
