Friday, May 7, 2010

The Euro Challenge

After a busy day watching the Mauritian elections results unfold, I still managed to stay up late last night. Another event was happening, which could probably be of as much, if not more, significance for Mauritius. The Dow Jones averages and the Euro were heading into complete collapse as the Greek financial crisis became a mainstream newstory. For some time now I have been saying to exporters here and anybody that is long euro that there is very little the Mauritian goverment or the central bank can do to help us. I said it in a prominent local business magazine to boot. Now that the euro is in complete collapse is the solution for Mauritius to let the rupee slide? That is likely to hit purchasing power in the short term but will help keep all our export oriented industries, including tourism, alive. The problem though is that we cannot foresee yet to where the euro is really heading to! The longer the authorities in Europe take the address the core issues, the more uncertainty will persist on the markets and the higher the risks of contagion to other countries of the union. This is really one of the biggest issues for the new Minister of Finance to be sworn in shortly and also for the BOM Governor.

Many econometric models conclude that the euro's "real" value is close to its birth rate in the high teens, say, $1.17-1.20. This seems to be a fair objective for it this year. However, the euro has spent many years now above fair value, so it should not be surprising if the euro's decline does not stop at fair value, but drops below it. That means a move to parity next year should not be ruled out.

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