The Engine of European Growth

The European Monetary Union is by no doubt the largest and most radical economic experiment that has ever taken place. How the Europeans established the political cooperation necessary to incorporate a Monetary Union is a mystery. The Euro Zone never came close to Mundell’s optimal currency area and Economist’s on both side of the pond have been predicting its demise. After ten years the critics are silenced but the question as to whether intra European trade has increased still remains. Theoretically it should increase in order to decrease variance and hedge against risks. However home bias in Europe is a political reality, Endesa and Alitalia are good examples. Has Euro become an optimal currency zone, and if so has intra European trade will increased? Europe has distinct differences, for a highlight ask someone from France about Italy’s victory in 2006. To argue for an increase in intra European trade know that all these countries indeed specialize. Swiss chocolates produced in Sweden don’t taste the same, nor does a Ferrari assembled in England look so magnificent. By specializing in what Europeans do best this should increase intra European trade which is true and can been examined. Definitely something to keep in mind when analyzing the Euro’s amazing appreciation and a persuasive explanation for European GDP growth.
As a trader I look at the GDP of the Euro Zone and see that growth is substantial. The hypothesis I have formed is just that a hypothesis but with a little bit of internet fishing you can confirm my suspicions. Better yet you can surmise that the Euro’s inception has cushioned Europe from the global slowdown. The European’s have increased trade with each other. With intra European trade far below intra U.S. state trade levels you can safely assume a further increase in intra European trade. Which increase the Euro Zone’s prospects for growth and makes Trichet’s rate decision a little more palpable for the French palate. An increase in interest rates when the Economy is not contracting is easy; it’s stagflation that’s the problem. With a little homework you can prove whether or not the intra European trade has ticked up and supported the Euro Zone’s growth. You will have an insight based on empirical evidence not some hunch based on a doji or two. My suspicion tells me that you’ll buy the Euro after finding that intra European trade has increased. You’ll conclude that this type of trade will become the engine of European growth for the coming years. As a consequence the EURUSD has only one direction to take.