Where now for the euro as it reaches 10-year anniversary?

Managers voice optimism single currency will survive the sovereign debt crisis.

As the single currency turns ten years old, fund managers are optimistic it will survive the debt crisis, despite a think-tank putting the odds of eurozone breakup at 99%.

The UK’s Centre for Economics and Business Research said last Monday there is a “99% chance” the eurozone will dissolve within the next decade, but managers are hopeful the currency will survive in some form.

Forex markets observed the tenth anniversary of the euro entering general circulation with some strong selling of the currency last week. The euro fell to an 11-year low against the yen and moved below $1.28, a 15-month low against the dollar, as Europe worries intensified.

“I am 100% confident the euro will exist in ten years’ time, but in the near term it is going to go lower,” said Brian Hess, manager of the $434m Legg Mason Brandywine Global Fixed Income fund, who is 25% underweight the single currency.

While most see further short-term pain for the euro, which remains historically strong, managers are torn over what it will look like in the event of a lasting solution to the crisis.

“If countries were to exit, in a worst-case scenario, it would strengthen the euro as the weaker states exited. Indeed, part of the reason it has been so strong is because of expectations of it strengthening if countries do leave,” said Thanos Papasavvas, head of currency at Investec.

However, Ben Gill, manager of Legal & General IM’s £492m Global Macro Themes fund, is less certain of the implications of a breakup of the single currency. “If Greece and the PIIGS fall out, the euro is inherently stronger. If Germany leaves, it is inherently weaker,” said Gill.

“I have seen nothing to suggest one is more likely than the other, so to have a long-term view on the euro at the moment is very difficult, if not impossible. It is much more to do with a short-term time horizon.”
Euan Munro, head of multi-asset investing and fixed income at Standard Life Investments, said SLI’s central view is the euro will ultimately survive, but warned some members may be ejected in 2012.

However, others expect this year will not be as decisive for Europe as some
commentators are predicting. Gill said growing signs of an economic recovery in the US and elsewhere will enable Europe to ‘muddle through’ the crisis once again this year.

“I think the rest of the world will provide enough strength to keep us going. Action is more likely to be forced onto the Europeans if the world as a whole has a co-ordinated slowdown. I do not think things will come to a head this year; it could be in three or four years’ time,” he said.