Believe it or not, the euro is overpriced

Here's an unsurprising observation (a blindingly obvious one, in fact): the euro is a sell. I have a double justification for bothering you with this banality.

The first is the slowness of market reaction to events in the world. For all the prolonged and violent unrest we have seen in Greece since the beginning of the year, the euro is still, in my opinion, overpriced against other major currencies. The financial and political data are there for all to see, but the euroland currency's rating remains obdurately high. As I write this column from my studio offices on the banks of the Thames, the riot police in Athens are once more out battling huge unrest on the streets. The police – who themselves face serious cuts in their own pay and ancillary benefits – are fighting people who, with some justification, believe that their future has been mortgaged by previous generations.

The €120 billion (Dh562bn) rescue package will be delivered at a cost of severe cuts in spending, and clawbacks of concession after concession given to powerful labour unions over the years. The injection of funds is an absolute necessity to keep the euro alive – but, I believe, it is at best a temporary measure.

The euro's slide against major currencies has only just begun. The European currency will stabilise in the next week or so, but I believe the slide will take it a further 30 per cent down, all the way to parity with the dollar and beyond.

The second reason for boring on about the euro, is a classic: I hate to be more smug than usual, but I told you so, I really did.

I was among the handful of commentators who appreciated early on how serious it all was. This is what I wrote in this space in a predictive piece, the first of 2010: "...the other thing I warned you about at the beginning of the year was the problem in euroland. The Irish are feeling the pain of reducing their debt, but the Greeks are on the verge of failing off the cliff. The social unrest occasioned by the government's austerity measures has, as predicted, been a factor in making Greek sovereign debt unpopular. There has even been talk of Greece's expulsion from the euro-fold.

And then, again in March: "The only nation that can truly prevent this happening is Germany. Not because Germany is in such great financial shape itself, but because the country has a reputation for good financial order... The Germans are credible, still – just. It is they who will bail out Greece – and the euro, if anyone can."

And so it has come to pass. The Greek premier George Papandreou has talked about the necessity for Greece to make "great sacrifices" to avoid bankruptcy. Greta sacrifices are indeed being made all across the euro zone.

Ireland, a less politically volatile country than Greece (thank goodness), is suffering in relative silence. The cuts implemented by Dublin have been every bit as painful as those that the Athens administration is now trying to implement. And we should not ignore the other side of the equation. The privations suffered by the countries that need bailing out are counterbalanced by the costs faced by the countries providing the funds.

It seems to me there's just enough of the two vital commodities – money and political will – to prevent the Greek state's being declared bankrupt. A declaration of bankruptcy would see the euro lose five per cent overnight, with a terrible meltdown to follow.

But assuming that the Greek state bankruptcy has been avoided, a number of factors conjoin to make the euro's future highly uncertain, at best. The economies of Portugal and Spain are both tottering under a vast burden of debt. They could well be next.

Spain has announced a package of €50bn worth of cuts, and the Madrid administration insists it will not need the rescue that the Greeks require. But this may be more tricky than it appears. Spain has to deal with the highest unemployment rate in Europe, at more than 20 per cent – and nearly half Spaniards under the age of 25 do not have a job. That's a recipe for political volatility.

If help is required by Spain, or Portugal, which has similar if slightly less acute problems, I fear that the consequences will be truly catastrophic.

- The writers is a journalist, author and commentator on international business affairs

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