Of course not, but the alternative is worse.
Like the rest of the world, Europe would love a weak currency to stoke the export fires. But the euro weakness seen early in 2012 came at a very steep price, a price the ECB and EU leaders are unwilling to pay.
Given the choice between political and financial instability and the resulting weak currency on the one hand and a relatively firmer political and financial foundation, my guess is that European leaders will choose the later every time.
What we are seeing is a tectonic shift from a world in which the viability of the euro project was severely in doubt to one where the market believes a sufficient backstop has been put in place to prevent a catastrophic meltdown. No one believes Europe’s problems have been solved nor that the future will be without setbacks. What has changed is the belief that there is sufficient resolve to meet the challenges that surely lay ahead rather than an impetus to pull the plug on the project and go back to an era of floating European exchange rates. That option has been taken off the table.
What’s the likely road ahead? In my view, an overshoot to the upside. Forex rates always move farther and faster than most believe possible. My guess is that in the next month or two we get a blow-off to the topside, maybe as high as 1.4200, before the euro settles back into a trading range, probably not too far from present levels in the 1.30/1.35 area.
