Forex Response to a Competitive Euro Zone Cost Structure

Farsighted multinationals are investing in Europe as fiscal discipline and a resolution of the debt dilemma promise a more competitive Euro Zone. For currency traders the question is what will be the Forex response to a competitive Euro Zone cost structure? Euro Zone fiscal austerity promises to bring governmental costs in line, perhaps cause a recession, and generally reduce the cost of doing business in Europe. Multinationals are always interested in a well-educated work force, modern technology and infrastructure, and a low cost of doing business. A retooled Europe may just fit the bill for international companies looking to open new research and production facilities. The scenario we have written about on these pages envisions a recession in Europe over the next year or two as the Euro Zone nations reduce government spending and attempt to get their debts under control. The Euro may well fall in value during this time. The result will be a cheaper Euro, cheaper European labor, and cheaper business costs across the Euro Zone. On the far side of this evolving scenario we will likely see a stronger Euro as a Forex response to a competitive Euro Zone cost structure.

New technologies may well lead the way with investment in a more cost effective Euro Zone. The nations of Europe have strong educational programs. This leads to a well-educated work force. Countries like Germany provide entry into apprenticeship programs at a young age, mixing work experience with the last years of formal education. European universities have been world leaders in advanced education for a millennium. Although the current state of affairs in the Euro Zone is difficult brighter days may lie ahead. It may be time to buy puts on the Euro today as a recession threatens. But, the Forex response to a competitive Euro Zone cost structure will likely be a stronger Euro in the longer term.

A Forex response to a competitive Euro Zone cost structure may be just part of the story, however. This story starts in the USA with Federal Reserve Chairman, Ben Bernanke. Mr. Bernanke is an acknowledged expert on the causes of the Great Depression. Many believe that it was fate that put him at the helm of the United States Federal Reserve when the worst recession in 75 years hit. The short version of this story is that many now understand that a recession in the 1930’s was converted into the Great Depression by misguided economic policy. The US started a trade war by upping tariffs. It also let many banks fail and did little or nothing to keep credit flowing. At the time many were mindful of the German Weimar Republic which printed so much money that it took a million Deutschmarks to buy a loaf of bread. Mr. Bernanke’s approach this time around was to keep credit flowing, not start a trade war, and print money to help replace the roughly $7 Trillion in equity that disappeared virtually overnight when the stock market crashed in 2008. European Central Bank monetary policy is mimicking that of the Federal Reserve. Both are replenishing lost equity and printing money to accomplish the task. The end result will likely be a resolution of debt dilemmas and cheaper Euros and dollars. Since China and nations across the world are doing the same thing we may see little difference in Forex rates but more expensive commodities. The path to Euro success will probably lie in a Forex response to a competitive Euro Zone cost structure, more employment, more exports, and a more prosperous Europe.