Euro falls in the wake of Italian Prime Minister Monti’s resignation announcement

Italian Prime Minister Mario Monti

Italian Prime Minister Mario Monti

As fiscal cliff talks continue in the U.S., the announcement this week that Italian Prime Minister Mario Monti will resign in the next few days forced the euro into a two-week low and further plunged the world’s economy into uncertainty.

The euro fell up to .3 percent to $1.2880 in the aftermath of Monti’s announcement. The British pound also hit a three-week low of 79.865 pence. Monti’s surprise announcement is being depicted by political experts as a strategic move against former prime minister Silvio Berlusconi, who also announced this week that he plans to run for prime minister for the fifth time despite the fact that he was forced out of office more than a year ago due to his inability to get Italy out of the debt crisis. Monti’s resignation forces an earlier election that could take place as early as next February, in which he is expected to run, giving Berlusconi less time to rally his party.

Contrast to U.S. job statistics

Despite the drop of the euro, Reuters reports that U.S. job data shows increases from October to November and that the unemployment rate fell to a four-year low of 7.7 percent. U.S. consumer confidence dropped, however, and with the fiscal cliff waiting in the wings, there isn’t a lot to be positive about.

According to the Daily Herald, in a December 7, 2012, post by Bloomberg News, “Euro drops due to Germany forecast,” U.S. non-farm payrolls rolls rose by 85,000 workers in November from October’s increase of 171,000, demonstrating that there is reason to be optimistic on the domestic front.

“Payrolls exceeding estimates ‘will send a message that the U.S. economy is still expanding at a modest pace,’ said Hans Kunnen, chief economist at St. George Bank Ltd. in Sydney. ‘I’m more positive on U.S. economic growth, and therefore the U.S. dollar growth.”’

The downside

Not everyone is as optimistic as Hans Kunnen. How the decline of the euro will play into the global economy’s potential demise is a viewpoint shared by many. In the unlikely event that Berlusconi gets reelected, and the euro fails, there is the likelihood of the American economy plunging into a recession. In “The Perverse Side Effect of the Euro,” a November 4, 2011, post to US News and World Report, Mortimer B. Zuckerman outlined how a weakened American economy is vulnerable to a European financial disaster.

“But it’s been unthinkable because the blow to confidence and trade would be enormous,” Zuckerman wrote. “Europe would be set back 20 years and the contagion would not be confined to Europe. We would be looking at the possibility of a worldwide financial meltdown.”

The forecast

The European Central Bank said this week it will not cut its interest rates any further beyond the record low of 0.75 percent. ECB’s forecasts include:

  • inflation will come between 1.1 percent and 2.1 percent next year
  • in late 2013, economic activity should gradually recover as global demand strengthens
  • gross domestic product in the euro zone will come between a 0.9 percent drop or a 0.3 percent expansion next year

In a December 7, 2012, post to The Irish Times, “Draghi warns of delayed euro zone recovery,” European Central Bank chief Mario Draghi suggested that the economy is more likely to shrink than expand over the next year with recovery in the euro zone not taking place until at least the second half of next year.

“These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States, possibly dampening sentiment for longer than currently assumed and delaying further the recovery of private investment, employment and consumption,” Draghi said.

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