For investors around the world, much of the news coming out of Europe seems to be getting lost in translation.
Markets gyrated last week, for example, after high-level Hungarian officials were quoted as saying the country could be on the verge of default. The country's GDP might only be $155 billion -- smaller than that of Missouri's -- but the talk was enough to rattle markets already nervous about Europe's debt loads.
The government of government of Prime Minister Viktor Orban this week distanced itself from the statements, which some experts viewed as aimed at preparing Hungary's domestic audiences for upcoming budget-tightening and austerity measures of the type that are already sweeping the rest of the Continent. And while much is being made of the dampened demand that will result from the spending cutbacks, investors seem to be ignoring the mounting body of evidence about the benefits that come with a weak euro.
Consider, for example, the surging German industrial sector: Factory orders blazed ahead of expectations to post month-over-month gains of 2.8%, following an upwardly revised 5.1% increase in March, according to government statistics released on Monday. Orders are up about 30% from last April, when the worldwide recession was at near its nadir.
The broader 16 eurozone nations meanwhile, saw exports rise to 2.5% in the first quarter of 2010 from 1.7% in the fourth quarter of 2009 according to EU statistics released last week.
Realizing That Weaker Can be Better
A growing number of Wall Street players are warming up to the benefits of a weak euro. Investment banks Goldman Sachs (GS) and Morgan Stanley (MS) have come to recognize the silver lining in the tumble, joining Credit Suisse (CS), which forecast in May that the a weak euro will boost exports and eurozone GDP by 1%.
The lesson isn't lost on the leaders of major European economies, either. French Prime Minister Francois Fillon said he welcomed the euro's slide against the dollar, and French President Nicolas Sarkozy has been among the most adamant heads of states pressuring China to revalue the yuan upwards.
"The president and I have been saying for years that the euro-dollar rate didn't reflect reality and was penalizing our exports," Fillon said. With the yuan effectively pegged to the U.S. dollar, the euro has now weakened compared to the Chinese currency as well.
Dangerous Slide or Healthy Rebalancing?
Stronger exports thanks to a weakening euro may well help offset the dampened demand that will result from budget cuts, the economic factor currently being focused on by most analysts.
"Contagion from the European crisis could come via falls in private or public spending plans, due to increased uncertainty or reduced credit flows from banks or capital markets," analysts at JP Morgan wrote in a note to clients last week. "We know that these pressures have induced fiscal tightening across a greater number of European countries, but by our measures the aggregate impact only brings fiscal thrust in the Euro area to neutral for this year and -1% of GDP for next year."
Despite the chronic chaos surrounding it, the slide in the euro may drive a healthy rebalancing for the global economy instead. The currency has long been overvalued, and the export benefits that its decline brings could help the eurozone avoid a painful recession even as it makes the inevitable budget and debt cuts..
Many investors have perceived the euro's tumble as foreshadowing the breakup of the eurozone. But, in fact, it may be paving the way for a much stronger Europe.
Hooray for the Weaker Euro: Eurozone Exports Jump