Project Syndicate (USA): from American exceptionalism to European

New haven- these are tough words from the title of this article will have to swallow convinced the skeptics. Like many, I have critically assessed the Economic and monetary Union of the EU (abbreviated EMU), considering this dysfunctional currency zone. Despite the strong political commitment to European unification as the antidote to a century of wars and horrific bloodshed, the design of EMU has always lacked the critical third leg — the budget of the Union.

Now it is not so. Reached on 21 July, a historic agreement to Fund the recovery of the EU economy in the amount of 750 billion euros (868 billion), which was called “Next generation EU”, radically changed the situation, with serious long-term consequences for both the overvalued dollar and undervalued Euro.

Unlike the US, which is clearly missing the opportunities afforded by epic crisis covid-19, Europe was at the height — and not for the first time. In July 2012, in the midst of which seemed fatal from the sovereign debt crisis, the then ECB President Mario Draghi vowed to do “whatever it takes” to defend faced with the difficulties of the European currency. This promise has strengthened the credibility of the European Central Bank as a steadfast guardian of the single currency, but it did not help to solve the larger problem: the partial surrender of national sovereignty for the sake of pan-European mechanism of fiscal transfers.

The agreement of July 21 performs exactly this task. Have tripod design of EMU, finally appeared all of three pillars: the single currency, single Central Bank, a convincing commitment to a unified fiscal policy.

Of course, this agreement is far from perfect. First of all, it requires unanimous approval of the 27 EU member States, and this is always a nervous moment in the current tense and polarised political climate. In addition, sharp differences resulting from the structure of the new EU Fund, which eventually will consist of one-time grants to help combat the effects Covid (390 billion euros) and from long-term loans (360 billion euros). The devil, of course, can hide in the details, however, the result is obvious: the plan of Foundation “Next generation EU” will allow to attract critical support due to large releases of European sovereign bonds. Finally, Europe will launch a new risk-free asset in a world where until now was known only one such asset — US Treasury bonds.

Budget breakthrough Europe drives an important wedge between the overvalued dollar and the undervalued Euro. The last trades on the currency markets seem to demonstrate the understanding of this fact. However, there is still a long way. Despite the sharp rise in June and early July, the broad index of the Euro in real terms is still 14 percent below a record high reached in October 2009, and the dollar, despite weakening in recent weeks, still 29 percent above their lowest level recorded in July 2011. My forecast decline in the broad dollar index by 35 percent based on the belief that this is only the beginning of a long overdue equalization of relations between the two largest currencies in the world.

I am well aware that the forecast exchange rates is usually the most difficult of all macroeconomic projections. Former Chairman of the Federal reserve Alan Greenspan has compared it with a coin toss. But sometimes it is necessary to make an attempt.

I hold a bearish view, that the overvalued dollar is ripe for a sharp downturn, and, as the analysis shows, there are two reasons: the rapid worsening of macroeconomic imbalances in the United States and the government of the country, which abandons any semblance of global leadership. Breakthrough on July 21 in Europe (and its value to the Euro), only reinforces my confidence.

Regarding macroeconomic imbalances, the sharp decline in domestic savings in the United States (this factor was the basis of my original hypothesis), it seems, is already underway. First, the pandemic has led to a surge in the level of personal savings, but now the trend began to decline: the level of personal savings fell from 32% in April to 23 percent in may. Meanwhile, the Federal budget deficit demonstrates the explosive growth: in June it had increased to 863 billion dollars, which is almost equal to the deficit for the entire 2019 — 984 billion. The U.S. Congress for several days can pass another law about providing antiastenicescoe assistance amounting to several trillions of dollars. This will lead to a strong negative pressure on the modest size of domestic savings in the country: the level of net national savings in the first quarter of 2020, passed under the sign of the pandemic amounted to only 1.5 percent of national income. Thus, the current account is on track to commit a record deficit.

From this point of view particularly compelling is the comparison with Europe. According to forecasts of the International monetary Fund, in 2020 the deficit of the current account of the United States will reach 2.6 percent of GDP, and in Europe for the year is expected surplus of this account in the amount of 2.7 percent of GDP. As you can see, the difference is 5.3 percentage points. And since the United States entered the crisis covid with a much thinner cushion of savings, and they are much more aggressive act on the budget front, the differentials of the amount of net savings and the current account will continue to change in favor of Europe, creating a significant downward pressure on the dollar.

The same can be said about the situation with global leadership, especially now, when America promotes the de-globalization, the gap of economic ties and trade protectionism. I made a deep impression on recent European efforts to tackle the problem of climate change, not only the coordination of the plan “Next generation EU” with the requirements of the Paris climate agreement, but also the allocation of almost a third of the total budget package for the creation of “green” infrastructure and other such initiatives. Unfortunately, the President of the United States Donald trump is moving in the opposite direction and continues to undo environmental regulation imposed by the administration of President Barack Obama (not to mention U.S. withdrawal from the Paris agreement in early 2017).

No less striking is the difference in the fight against сovid. As of 21 July for the previous seven days the number of new infections in the U.S. rose to a record high of 67 thousand a day. Shocking that this is 208% higher than in mid-June. And in the 27 EU countries the number of new confirmed cases has remained more or less stable since the middle of may — a little over 5 thousand a day. Given that the population of the EU by 35 percent more than in the US, a dreadful failure of America to contain the spread of the coronavirus is even more evident in terms of per capita. In addition, the system extension test for coronavirus in the United States in reality has slowed down, and at exactly the moment when the number of infections began to grow rapidly, depriving of sense, and without the empty justifications of the administration of trump, if an increase in the number of tests leads to increase of the statistics of those infected. Given that Europe is much more active policy of protecting public health and monitors compliance with the necessary rules which currency would you prefer?

American exceptionalism has long been the icing on the cake for the Teflon dollar. But those days are behind us. Being the most hated major currency in the world, the Euro — quite possibly — moving to own European exceptionalism. As a result, downward pressure on the dollar will only increase.