EUR/USD is a leading indicator of the European Union’s (EU) possible demise due to political pressure from creditor nations and their possible refusal to lend additional funds. It also shows the failure of the EU to respond appropriately to the crisis by providing meaningful assistance. If EUR/USD goes below 1.40 in the next two weeks, it may be time for an early exit from the EU and a move to a different world-wide financial system.
In addition, the economic outlook in Europe is poor due to the weak global economy and European Union governments are under tremendous pressure to maintain the status quo or face a possible EU exit. This is especially the case in countries like Italy where the government has implemented major tax increases that are directly correlated with negative economic results. The recent announcement by the European Commission that it will introduce measures to force Italian companies to continue to purchase from the country’s state-owned Finmeccanica, despite the ongoing economic crisis, is one of the final nail in the coffin. If Finmeccanica were to fail to do so, the Italian government would not only suffer a major blow to its own economy, but would also be left vulnerable to the same problems that are currently impacting other EU countries.
As part of its Digital Single Market agenda, the EU is also attempting to impose tighter controls over financial institutions like banks and finance companies. In this regard, the EC is likely to pass legislation that imposes higher capital requirements on commercial banks and the EU’s largest financial institution, the European Investment Bank. This is intended to prevent European taxpayers from having to provide bailouts to the likes of the Italian bank Monte dei Paschi di Siena (MPS), which is still the largest debtor of Italy’s Finmeccanica. If capital controls are not imposed, the EC could force MPS to declare bankruptcy.
Another indicator that the EU may be about to make concessions on monetary policy is when European Central Bank officials and Commission officials are reportedly close to finalizing a series of new measures aimed at reducing the size of the euro. These measures are being developed as part of the EU’s ongoing efforts to reduce the impact of deflation on the overall economic recovery in Europe.
If the euro does continue to decline, there is a strong possibility that the European Commission and the European Central Bank could announce an EFSI (European Systemic Index of Consumer Prices, which includes a measure of Euro-based inflation), which is designed to replace the existing Eurostat index. and is designed to serve as a more comprehensive indicator of the real value of the Euro in relation to other major currencies.
The EFSI will likely be included in the EU’s Digital Single Market initiative, which aims to reduce the number of economic policy instruments that have traditionally been used to support national economies. The EC’s proposed indexing of the index, which would include Eurostat data, would make available to national authorities across Europe a more consistent set of inflation indicators that are directly relevant to assessing the performance of the euro in comparison with the major currency pairs.
In addition to the inclusion of EFSI, there are also some very strong indications that the EU may be considering the adoption of a new fiscal framework for the future of the European Union in addition to the introduction of a new legal structure for its Digital Single Market initiative. A review of the EU’s current economic policy frameworks is expected in the near future.
It appears as if the EU is preparing to embark on some form of a massive retreat from its economic policy initiatives and is beginning to look beyond the confines of the euro area. While it is impossible to determine whether or not these moves will have any bearing on the EU’s ability to successfully renegotiate the terms of its bailout agreements with the European Union’s bailout funds, it is important to remember that the EU is already facing several major obstacles to its efforts to reform itself and get back on its feet. If and when these efforts begin to bear fruit, the euro will likely experience a significant rebound, as will the euro and the European financial system.