Confessions first: I hate the euro. Always have. I like a European free trade zone, but a common currency with no unified government is like giving one house on your street control over everyone’s else HVAC system. It’s a piss-off that will end badly, but after a cooling-off period you will be allowed to use the neighbor’s pool again.
Having said that, however, I’m not buying the current story about where the the euro goes over the next few years. Yes, the currency is in real trouble, and my current guess is that it changes dramatically in the coming years, but the path there is a strange one that will cause much pain along the way.
One guess? How about this:
- Current sovereign/growth/debt bearishness continues, and the euro finds its way to something approximating parity with the dollar over the next 6-12 months.
- At least one, and maybe more countries take a "euro sabbatical", and around the same time the U.S. gets hit by bond market nervousness about its debt, deficit and entitlements
- Both of the preceding drive the euro higher again, to the point that some people begin re-declaring it the new reserve currency
- European sovereigns hate the appreciation, as its kills exports and makes weak economies weaker, and more begin bailing from the damn thing
- The euro becomes more like gold, or maybe IMF SDRs, a kind of pseudo-currency that people who hate currencies use, and it falls again, perhaps ending up slightly below current levels
Sure, there are lots of other ways this could play out — it could go straight to zero, which would be pleasing, if mostly because of how dysfunctional it is, and how much of a handcuff it is for screwed European sovereigns. But nothing ever goes in a straight line, partly for technical reasons, but also because actions and reactions reinforce one another, like now.
Don’t like my "euro in 2015" scenario? Create your own.