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Austerity Will Push Euro to $1.50 by Year End: Economist

Thursday, 7 Oct 2010 | 5:51 AM ET

The euro will keep rising and will likely end the year at up to $1.50, as the European Central Bank pursues a highly deflationary policy, despite buying euro-denominated bonds, economist Warren Mosler, founder and principal of broker/dealer AVM, told CNBC.com.

Euro bills in hand
AP
Euro bills in hand

Mosler, who predicted that the euro would bounce back towards $1.60 in June, when the single European currency was trading at around $1.19, said there was nothing to stop the euro's appreciation versus the dollar, short of a policy response from the European Central Bank.

"If it (the euro) keeps going at the rate it's going, it could go to $1.45-$1.50 by the end of the year," he said.

The ECB started buying government bonds belonging to distressed euro zone members such as Greece, Ireland, Portugal and Spain to ease market concern regarding these countries' ability to fund themselves and some analysts have said the measure may be inflationary.

But the policy is, if anything, deflationary because it is accompanied by tough austerity conditions, Mosler said.

"They're causing a shortage of euros by requiring governments to rein in spending. It's a highly deflationary move and that's what is driving the euro higher," he said.

"Right now the ECB and the euro zone are tightening up their supply of euros."

Billionaire investor George Soros accused Germany earlier this week of dragging the euro zone in a deflationary spiralby promoting austerity measures.

Many analysts have said that the ECB is promoting policies that go hand in hand with the euro zone's biggest member's fears of inflation.

One element of uncertainty is the ECB's willingness to continue to buy government bonds, Mosler warned.

"No-one knows how long the ECB are going to do it… they could change their mind tomorrow," he said.

But market speculators, while being able to attack the euro zone's weakest members, will not be able to speculate against the central bank, which can print money and distribute it among its members at any time, Mosler said.

"The markets cannot punish the ECB. They can't punish the issuer of the currency," he said. "When you're the issuer of a modern currency, you can credit an account and there's nothing the market can do about it."

He reiterated his view that the ECB has now de facto shifted to deciding fiscal policy for the countries in the single currency area, since their help by buying bonds comes with conditions regarding cutting debt and budget deficits.

Another factor behind the euro's appreciation will be China's announcement that it will buy Greek debt, which was hailed in Europe as proof of confidence in Greece's ability to pay its debt.

"China would like nothing more than to buy euros – they're doing it through buying Greek debt. That's just one more force for a stronger euro," Mosler said.

Contact Europe: Economy

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