Why is the euro rising?

At the beginning of the year, the euro has risen to its highest level since September 2017 – and is already in line with the highs of the previous year. But why?

Actually nothing does really speak much for the common currency at present! First of all there is Germany: It´s still completely unclear whether there is a grand coalition – rather, the probability is high that in a survey of SPD members just these members will vote “no”, because they feel that a renewed Coalition for the SPD with Merkel weakens the party even further. What would happen then are new elections – but what should come out of these new elections other than in the elections last September?

Rather, it´s likely that we would get a very similar result. Since the Jamaican coalition is likely to have done well in the foreseeable future due to the atmospheric disturbances, then the only conceivable result would be a minority government of the conservative CDU/CSU, tolerated by the SPD. In fact, this would mean that Merkel is only a shadow of her former dominant position. Germany would then de facto fail as the leading power of the Eurozone – when Merkel would stay in Brussels for international negotiations, she always would have to call Berlin to ask for a majority support, before she can agree anything.

Then Italy, where the elections will take place on March 4. Probably, according to the current state of the surveys, there will also not be a stable government – so here too, at best, Italy will have a minority government – or perhaps Italy will see the victory of parties that reject the euro. If that happens, this threatens the euro area as a whole, threatens especially the “idea of the euro”.

Add to that the conflict with Poland over the refugee issue after the EU has activated Article 7 (the “nuclear option”). So you punish a country that benefits like no other from the EU funds – anyway, East Central Europe does not seem to correspond quite well to the value canon of the old EU. So also here are centrifuges, which could increase in 2018!

The only argument that actually speaks for the euro is the USD weakness. Clearly, another massive increase in US debt through the US tax reform is playing here. But this could turn out to be a rather short-term phenomenon – it is possible that the US tax reform will bring dollars from abroad back into the US, creating dollar needs in the “rest of the world”.

So some arguments show that the air is getting thinner for the euro, especially as the ECB is likely to see a rise in the common currency above 1.20 with rather mixed feelings.

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