The Eurovision Song Contest might have been won by a (non-Euro) country with a song called “Euphoria” but the dominant recent emotion in the Euro-currency markets has been acute angst.

The past 18 months have seen a blur of inconclusive and fractious conferences on the problems of Europe’s single currency. Having enough summits to create a ski resort, perhaps that is what Europe’s leaders should do:  “Downhill all the way”?
Repeated meetings over the summer sought a lasting settlement on Greek debt, to create a robust firebreak against sparks spreading to other countries with impaired credibility but better fundamentals and to render the banks resilient to losses from their holdings of Greek and other sovereign bonds in the Eurozone.

There is little dispute that there is a solvency issue for some European governments – they have too much debt for any plausible mix of tax rises, spending cuts and structural reforms to work. Unless some of the debt is forgiven, paid back on less demanding terms or defaulted on, their economies will be locked into a depression.

Left to their own devices, currencies are useful mechanisms for compensating for economic policies or events which significantly change the relative performance of different countries’ economies. Unfortunately, the involvement of politicians, frequently with other motives or shorter term horizons can complicate this stabilising mechanism. Examples include Chinese policy on the Renminbi, the Euro’s foundation, and sterling’s volatility in the past 25 years.