A skyrocketing euro for a deep diving Europe

Although it is not the first time I write about why I think the actual exchange rate of the euro against other currencies is wrong (see here and here), the latest developments on the Eurozone's life well deserve a revision of the subject. A quick look at the Eurozone lets one see some not very encouraging facts. The Greek tragedy has been quieted down in the last days but is far from over. In fact almost everybody with eyes in the matter is expecting a default sooner rather than later. The only uncertainty seems to rest in knowing if it would be an orderly default, basically a giant debt restructuring effort (hopefully...), or a messy one.

On the opposite side of Europe we have Portugal, but it seems to be in the opposite side only geographically speaking, because its bonds have also been kicked out of investment grade and are now officially  'junk' grade like Greece's. This will make Portugal financing efforts (even) more difficult, which in turn could end with Portugal asking Europe for more money soon. And to complete the domino effect, this troubles are putting extra pressure into Italy's and Spain's not-exactly-buoyant finances.

Credit: Yahoo! Finance

But the euro simply does not care. As seen in the graph above, the euro is rising against the US Dollar, the British Pound and the Chinese Renminbi, and it is doing so with a specially notable rally in the actual week despite all the bad news surrounding the Eurozone. The european currency is spiking also against special cases like the Japanese Yen and the Swiss Franc, although this is a totally different matter. The Yen has its own set of playing rules because of the Fukushima incident, and the Swiss Franc had been overtly growing uncomfortable with its strength against the euro affecting their exports competitiveness. The case with China's Renminbi is a difficult one to analyze, but what happens with the Dollar and the Sterling Pound?

The Dollar and the Pound are clearly the most important currency pairs for the euro when it comes to commercial, industrial and financial trading; so imbalances in these exchange rates can cause terrible effects on the Eurozone. We could sure blame this rising trend on the ECB (European Central Bank) understandable efforts in controlling inflation, but it would be delusional to justify such a big spike just because of that in the actual circumstances. With commodities moderating their prices in the last few days thanks to the IEA's (International Energy Agency) release of millions of oil barrels inflation should not be the most pressing matter on ECB's table right now. 

Do not get me wrong, I am also worried about inflation killing any kind of steady economic recovery in Europe but I think, in this case, it would be totally justified to concentrate in solving the urgent problems before attacking the important ones. The urgent problem is that markets have a big confidence problem with the Eurozone's debt, and every investor knows that in finance, confidence and trust is everything. 

Having a strong euro would help with these debt problems if the creditors of the Eurozone's troubled countries had a different currency, but they do not. Greece, Ireland and Portugal creditors are mainly their European neighbors. The problem is still there no matter how strong the euro gets. 

The solution to Europe's debt troubles should attack two fronts. One is of course applying those spending cuts which are so difficult to digest and understand for the average citizen; but the other front must focus in doing better what you are already doing. In economics, a big part of doing things better means being more competitive.With such a strong euro this would be very difficult to achieve...

Article first published as A Skyrocketing Euro for a Deep Diving Europe on Blogcritics.