Ro-Ro Yoyo of the Euro

Why don’t we question the markets? According to the world’s commentariat, the euro should be dead already.

The euro crisis is limping into its third year, like a badly scripted telenovela.

Predictions about the sovereign debt problem at its heart typically embarrass those making them.

According to large swaths of the world’s English-speaking commentariat, the euro should be dead already, and Greece should have exited the eurozone by the end of 2011… OK 2012… let’s try 2013?

So, at the risk of humiliation, here’s my own prognosis.

The euro is here to stay.

But the crisis won’t end until stock and financial markets emerge from the panic attack from which they have been suffering since the once-in-a-century earthquake of the global financial crisis begun in 2007.


Reason one for this is “Ro-ro”, short for “risk-on-risk-off”.

It’s the phrase used by befuddled fund managers to explain why it’s no longer useful to try to pick stocks by reading companies’ annual reports, studying their cash flows and price/earnings ratios, because entire asset classes are going up and down in price as if all companies were the same.

The reason for Ro-ro?

Overwhelming fear.

Investors nowadays are moving like a herd of wildebeest when a tiger shows up at the water-hole: en masse, away from danger, wherever and whenever it is spotted.

The tiger, in this case, is the euro crisis.

As a writer for the Financial Times put it:

“To buy Vodafone shares, soyabeans or the Canadian dollar are becoming essentially the same trade when each day’s profit or loss is determined to a large degree by results of a sovereign bond auction or comments by a central banker.”

Reason two is “yoyo”.

In my experience covering the euro story for many months now, this is the nature of whiplash market reaction to news of, say an EU Brussels summit concluding with something that appears to be a step forward to solving the crisis.

Initial euphoria (causing bond yields to drop for Spain and Italy, for example,) gives way to dark despair when traders actually read what was decided and thereby spot (or imagine) loopholes, wiggle-room, and escape hatches.

This is exactly what happened last June.

Complicated story

Perhaps as a result of these swings, Europe’s political leaders – notably Angela Merkel of Germany and Mario Monti of Italy – often accuse the markets of betting against the euro, of effectively willing its demise, by shorting the debt of troubled nations such as Spain, Portugal and Greece.

It’s an assertion that it is difficult to prove, as “the markets” are made up of thousands of traders, financial institutions, and also national banks and especially the European Central Bank fighting back against that shorting, by buying up bonds under attack.

Still, as a journalist trying to explain – including to myself – a complicated story with many moving parts, I do find it helpful to provisionally question what anyone who completed an Economics 101 class learned: that markets are rational.

The euro crisis may be never-ending not just because European governments can’t act decisively, but also, in part, because markets are no longer acting entirely rationally as they repeat their Ro-Ro yo-yo against the euro.

If you are hoping for an end to the crisis, you can continue to watch the politics.

But I would suggest keeping an eye on the markets and awaiting the critical moment when somehow they manage to take a deep collective breath, relax, and reconnect with their old, rational way of thinking.

Follow Nick Spicer on Twitter: @nickspicerAJE