The Economic Advisor

Pass the Ouzo!

The rest of the so-called PIIGS-Portugal, Ireland, Italy, Greece, and Spain-have debt problems, too. This means that after a big dip in the dollar last year your European vacation is about to get a whole lot cheaper. Not that Europe’s woes are a laughing matter. Far from it. But it’s good to know that America isn’t the only country with unsolved debt problems.

The U.S. dollar has reached its highest level against the euro since July. And I expect it to climb a lot further before the year is out. The euro is sinking against the dollar because investors hate uncertainty. And nobody knows if Europe will be able to sort out its problems and avert a collapse of the euro.

This may seem strange coming from a long-term dollar pessimist. But I believe there’s still a big credibility gap between the U.S. and Greece. So far, there have been no riots on the streets of Washington as a result of the economic crisis. In Greece, they’re not far off.

This is all no doubt to the benefit of Canadians and Americans planning to travel to Europe this year.

Over the last decade, a steadily strengthening euro-it’s risen about 30% against the dollar in that time-has put many European destinations out of the reach of Americans. London, Paris, Amsterdam, Madrid-these are all great places to visit, but not with an ascendant euro and a descendent dollar.

But let’s not get too giddy. Dig into the numbers and it’s plain to see that Greece’s debt drama could one day be America’s.

In both countries, there prevails the deeply flawed idea that governments can “fix” economic problems by spending out of an empty pocket. In Greece, this led to a budget deficit of 12.7% of GDP-more than four times the ceiling for countries using the euro. In the U.S. the deficit is running at 10% of GDP.

I believe the dollar’s days are numbered. But for now, at least, it’s the euro that’s in the spotlight. And unless things change radically, it’s likely to remain that way for some time. What’s really worrying investors is that the euro is a currency shared by 16 different countries. For a long time, cynics have called it an experiment, not a currency. So far, this experiment has held together…and even thrived.

But what happens when one country fails? Will richer European nations, such as France and Germany, ride to the rescue, checkbooks extended? I doubt it. And if these nations refuse to save the PIIGS’ bacon…what next? Unless investors have a satisfactory answer, I think the euro will stay weak…and North American vacationers could be in for some surprising bargains.

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