The euro is set to weaken as the 17-nation currency region has the weakest growth prospects globally, former Bundesbank President Axel Weber said.
“Europe has the weakest fundamentals,” Weber, who will become chairman of UBS AG in May, said at a conference in Abu Dhabi today. “If everybody has a loose monetary policy, then relative monetary policy will not drive your exchange rate. What will drive your exchange rate is fundamentals.”
The euro bloc economy may stagnate or expand by 1 percent this year, while the U.S. and the Middle East grow at about 3 percent or more, he said. Emerging markets will expand by between 6 percent and 8 percent, Weber said.
The debt crisis that began in Greece more than two years ago and spread to Ireland, Portugal, Italy and Spain has weighed on the region as government austerity programs drove up unemployment, choking growth. Unemployment in the euro zone rose to 10.7 percent in January, a 14-year high, the European Union’s statistics office said today.
The region will contract 0.4 percent this year, before returning to growth of 0.9 percent in 2013, according to the median estimate of at least 16 economist forecasts compiled by Bloomberg. The U.S. economy will expand 2.2 percent in 2012 and 2.5 percent next year, while Japan will grow 1.5 percent and 1.40 percent, separate surveys show.
The euro has climbed 2.6 percent against the dollar this year as bonds and stocks rallied after the European Central Bank lent more than 1 trillion euros ($1.33 trillion) to banks in its longer-term refinancing operations yesterday and on Dec. 21. It weakened 0.2 percent to $1.3293 at 1:57 p.m. London time, after reaching $1.3487 on Feb. 24, the strongest level since Dec. 5.
The euro’s rally is poised to reverse as demand fueled by the ECB cash wanes and foreign investors shun the region’s assets, Morgan Stanley said. The bank forecast the euro to fall to $1.27 by March 31 and to $1.15 by the year end.
“Most countries coming out of this crisis see a weak exchange rate as one part of the remedy,” Weber said. “In my view, actually a weaker euro is something that is in the books and part of an adjustment process in peripheral countries and that is not looked at too critically.”