Monocolumn: Forecast 2011: Embattled Euro To Face Another Turbulent Year

Monocolumn is Monocle’s daily bulletin of news and opinion. Catch up with previous editions here.

The euro ended 2010 with panic subsiding about a break-up of the 11-year-old currency region, but it still faces stiff tests in 2011 over the long-term viability of the EU dream of breaking down economic barriers and creating a rival to the dollar.

Fibs about Greece’s budget, surprise bank losses that drove Ireland to seek IMF help and paranoia that Spain will be left holding the bag for billions of euros worth of bust real-estate loans all conspired to send the euro about 10 per cent down against its US rival in 2010.

Mansoor Mohi-uddin, the Singapore-based chief currency strategist for UBS, predicts a year of “super-volatility” in currencies and a surge for the euro if the crisis drives a deeper integration than the EU’s fathers ever thought possible.

“If the European Union was able to solve the debt crisis, the euro would likely experience a major rally towards 1.50 against the dollar,” Mohi-uddin writes. “The eurozone could implement a fiscal union, whereby transfers from the wealthier countries would permanently bail out the peripheral countries.”

Such suggestions upset German voters and politicians, who resist bailing out the profligate and say a pan-European bond would be illegal.

Graham Turner of GFC Economics in London forecasts this anger will drive the EU apart instead of bolster unity. He said during the worst of the crisis in November that the return of the Deutschemark was a “realistic prospect” for 2011.

Germany and healthy neighbours such as Austria could leave the single currency, allowing it to devalue to a point where exports from Greece, Spain and Portugal would become competitive again.

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