Exchange rates. A vote of no confidence

The euro is losing its own referendum

CURRENCY markets hold daily referendums on economies, and lately traders have been voting against the euro area. At the start of the year, the single currency was worth over $1.35. It was the dollar that was losing support, as swing voters fretted about America's current-account deficit. On June 1st, however, the euro dipped below $1.22, its lowest since September.

Growth in the euro area is weak and business confidence is ebbing. (Despite this, the European Central Bank (ECB) chose not to alter interest rates on June 2nd, for the 24th consecutive month. But the proximate cause of the euro's unpopularity is those other referendums - political not financial, in France and in the Netherlands - on the European Union's constitution. As opposition to the constitution hardened before the polls, the currency softened. On the day after the French referendum on May 29th, the euro lost over a cent.

How tightly bound are the fates of the euro and the EU? The “currency without a country” as economists at Credit Suisse First Boston (CSFB) call it, “thrives on the common interests” of its members. But curiously, the euro might eventually gain from the recent turmoil.

The weightiest matter of common interest ever likely to face the euro zone is whether a profligate member could rely on its fellows to bail it out. The ECB is barred by treaty from doing so, but the markets implicitly assume it would. The spreads between member governments' bond yields are accordingly narrow. The no votes, CSFB reckons, may force a rethink: there will be less fiscal co-ordination, and the spreads between the bonds of Germany, with debts of 66% of GDP, and Italy, with 106%, should widen.

Quite right, too. Governments are more likely to overborrow if they and the markets assume they will be spared the consequences. If the markets deter them from ever testing that assumption, the euro will be on a sounder footing. You can have too much solidarity.

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