As The Euro Soars, This Is Where The "Max Pain" In Europe Is

Tyler Durden's picture

Determining the “pain threshold” beyond which the euro appreciation would significantly impair the recovery is crucial at this juncture. Deutsche Bank's quantification of this “pain threshold”, is not fixed but depends critically on the pace of global growth. If world demand accelerates from a current pace of 1.3% YoY to 4.2% YoY by Q3 2013 (30% below trend), as per OECD forecasts, the EURUSD exchange rate which would be consistent with maintained competitiveness would stand at 1.37 (not far from where we are).

However, if growth is lower (as we humbly suspect) the threshold for currency strength to hamper growth is considerably below current levels. What is more concerning, as a dysfunctional union of economies might be suspected of, is the divergences between member states and their pain thresholds.

Crucially, the fact that Italy and France are already facing problems as the current EURUSD rate is well above their pain threshold, while Germany remains below (despite its protestations) may be fuel for more Franco-German instability as the push-pull of easier monetary policy places Draghi between a rock of core stability and a hard place of depression.

EURUSD at 12-month highs...


Via Deutsche Bank, Euro appreciation: the moving pain threshold

Exchange rate issues have made a spectacular come-back in European policy debate this week, on the back of speculations on “currency wars” emanating from emerging economies and Japan. While market sentiment towards the Euro area and specifically on the periphery has improved significantly over the last few months, a higher euro is seen as a potential “spanner in the works” which could rekindle doubts surrounding debt sustainability there, if the expected export led recovery is postponed by several quarters by a loss in competitiveness.

When controlling for the pace of world demand and when looking at the Euro area as an aggregate, we are according to our estimates currently in or near the “danger zone” where the exchange rate is effectively undermining competitiveness.

We apply our model to the four largest economies of the Euro area. We find that while the pain threshold for Germany, and probably more counter-intuitively for Spain, now stands higher than any level ever reached since the beginning of monetary union, it is actually quite low for France (1.24) and Italy (1.17), for a world demand pace of 4.2%.

It is therefore surprising, at first glance, to observe that most of the recent flurry of comments on exchange rate issues came from Germany. We suggest that the German concerns over currency wars do not primarily stem from a fear of the consequence for German exporters, but rather from the fact that further euro appreciation could unduly delay the normalization of the ECB monetary policy framework.

What these comments from Germany reflect in our view is a concern that currency wars ultimately generate global inflation which the ECB could not easily resist given the persistent fragility of the periphery.

It follows from these considerations that on balance further euro appreciation is the likeliest path, short of a rapid relapse in widespread doubts in the periphery’s sustainability (which would be likely if the Euro area “misses the recovery” in 1H 2013. This means that France and Italy must make rapid progress on productivity and flexibility (as well as possibly off-shoring) to enhance their resilience to currency appreciation.

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fonzannoon's picture

My comment on that thread about Stolper. How many people can nail their black swan in January?

" My 2013 black swan is this guy gets one right."

whatsinaname's picture

Nice CNBC title - "Pending Home Sales Fall Because of Dwindling Supply".

Did not bother reading it.

LawsofPhysics's picture

Indeed.  Banks now have control over supply and are sirtting on lots of inventory.  Now about those wages...  unless of course the .gov is going to subsidize that too as it is impossible to pay a mortgage without one.

NoDebt's picture

It's not just the existing inventory they are sitting on, it's also the credit to finance building any more units to compete with their inventory.  They have the ability to make the market run at whatever pace they choose.  So they will choose a pace that makes sure they do not lose money.

Hope you like the houses you see out there because that's pretty much what you got for the forseeable future.

LawsofPhysics's picture

Yes, regulatory capture and ownership of your representation.  Isn't fascism great?  Long black markets and any physical assets that can not be devalued by these paper-pushing criminals...

Unfortunately for everyone, supply lines have real limits.

firstdivision's picture

Think this was a Goldman led push?

Dr. Engali's picture

 It pays to let the muppets win one every once in a keeps them at the table.

Sudden Debt's picture


LawsofPhysics's picture

So what you are saying is that "channel stuffing" is so easy, even a caveman can do it?

EscapeKey's picture

Oh Europe's been fixed, then, has it? Is that the corporate media narrative?

Spitzer's picture

best fiat out there. been saying it for a long time. eat it euro short

LawsofPhysics's picture

So much paper, mind if I have a look at the underlying collateral?

Rip van Wrinkle's picture

So what their saying is that France and Italy have to have unemployment rates similar to Spain?


Go long riot gear in Paris and Rome.

firstdivision's picture


"On a recent day on Barclays PLC’s stock-trading desk in Manhattan, an electronic platform posted a notice that Barclays was selling a large block of Pfizer shares. In recent years, a computer typically would have swiftly matched such an order with a buyer, sidestepping trading floors altogether. But soft trading volume has left many traders unable to move stock as quickly as they might like. That is one reason why Barclays connected its recently launched DirectEx platform to its trading floor. The move paid off when a client who was buying 150,000 shares on the electronic network decided, after chatting with a Barclays salesman, to take an additional 150,000 shares."

Can anyone tell me why you'd bother with DirectEx for your needs when your orders are not annonymous?

Dr. Engali's picture

Fire those printers up to ludicrous speed boyz....we have a currency to crush.

NoDebt's picture

Don't worry.  We'll beat them to the bottom. 

samcontrol's picture

Hey Zhers listen GOOD..

DBk and other banks are drowning in euros and dollars,,,they don't know how to make up losses anymore,, check out the bs they make up in Australia,lol.
The world is bankrupted yet an idiot like me is offered loans by ALL my banks at 1 percent, give me a break..they are drowning in it.
it took me two years to figure out the PONZI, and guess what,, it aint STOPPIN anytime SOON.....
Central banks will print and print and give free money to banks , they will buy government debt, and they will tax the shit out of all the idiots that pay taxes worldwide .Sheeple are wimps , no revolution in sight...the banksters are acting at will , governments are nothing but banksters' employees, obey or the highway ...countries could go the iceland or argentinian way,but wtf for...these guys' bonuses buy all of them Islands.... guns ,gold , beans and bitching on zh is not stoppin them!
Sure ihyper inflation will get here and pms will fly....but so will everything else. I faught it in my mind all i could, i faught the fed,,,sometimes, most of the times i go with the crooks.
. Putting cash to work long term to fight inflation and yes that includes pms , as for the physical (i like Sprott funds) and besides that i prefer real estate , sorry! To hard to get gold in Argentina, i have a sliver trip to Chubut planned. But those are hobbies, i will stick and increment to the PONZI market. If they reset.... , and they won't for
decades, because the madness so well described here(sarc), is perfection to them,,
and if they reset i won't give a fuck! We are all fucked! my idea of the world is not shooting people to survive. I' ll just ski off a fucking cliff.
To those who don't like my thought,cool and fuck you!

THE DORK OF CORK's picture

The Euro market state system has worked to extract core capital from former European nation states & send it to eastern plantations since at least 1980.


Its just what it does both during the credit inflation period and money deflation era.


The creatures of the temple have created the greatest monetary & social wrecking ball ever conceived.

From Germany With Love's picture

Tyler, can you outline the total consequences of Euro appreciation on periphery countries who don't have much to export anyway (like Greece)? Will they be better off if the Euro gets stronger or worse?

Which European countries will be the first to squeal? France? Italy? Germany?

Stuntgirl's picture

I'm wondering about this too.

Greece, like Spain, used to perform better with a lower Euro because of Tourism, not just exports.

At least in Greece that inudstry is dead, and nobody seems keen to protect it /revive it.

One World Mafia's picture

What happens to gold if the euro becomes the world reserve currency?

orangegeek's picture

The USD has four major currencies weighted 93% against it - Yen, Pound and C-Dollar - all are tanking. 


The other  - the Euro is completing a correction up before its collapse (see below).


And when the Euro collapses like the Yen, Pound and C-Dollar, the USD will rocket and Gold and US markets will collapse hard.

samcontrol's picture

and back to the article, i'm French and i would love to know what you meant by "fuel for more Franco-German instability" ?
Are you talking euro vs euro ? Franc vs dm ? Or something else?

Kind of a big word you are throwing around there TYLER ,considering the past and PRESENT.

They Tried to Steal My Gold's picture

This may be the start or a preview of the decoupling of the strong dollar and a higher Gold....


In other words..


GOLD goes up regardless...