The euro is set to sink to parity with the US dollar next year because of the slow pace of economic recovery in Europe, if it has not broken up by then, a consultancy predicted Friday.
In a quarterly report on global economic prospects, the London-based Centre for Economics and Business Research (CEBR) forecast that the European single currency would fall to parity against the US greenback next year.
The CEBR predicts that the US Federal Reserve Bank will start to raise US interest rates late this year in response to strengthening growth.
In contrast, it says, the European Central Bank “will remain hamstrung by the weakness of the European economy and will be forced to hold rates down.”
AUSTERITY
Several European countries have adopted tough austerity measures in a bid to drive down debts and deficits after Greece’s near-bankruptcy earlier this year threatened to engulf financial markets.
The eurozone governments agreed on May 9-May 10 to create a 750 billion euro (US$907 billion) fund with help from the IMF to support their weakest members.
BREAK-UP?
CEBR chief executive Douglas McWilliams said the report was prepared on the assumption that the embattled euro would still exist a year from now — but he was pessimistic about the long-term prospects for the currency.
“It is almost inevitable that the euro will break up at some point,” McWilliams said. “It could be soon, it might be in five to 10 years time.”
“In the meantime, the one certainty is that the euro will be weak,” McWilliams said. “It has already fallen by 30 cents against the dollar this year and will probably fall the final 20 cents to break parity when it becomes clear that US rates are about to rise while euro rates will be held down because of the weakness of the economy,” he said.
Report author Charles Davis said the global recovery was “surprisingly robust in the emerging markets while clear risks remain in the advanced economies,” highlighting two main concerns.
“Overheating in the emerging markets will require monetary policy tightening and the fear that in some of the weaker economies in the Western world that growth will slow even further when fiscal stimuli are removed,” he said.
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