In the wake of Donald Trump's victory in the U.S. presidential election, my colleague Mike Norman argued investors should short the euro. I think they should do no such thing.
Forget for a moment the fact that shorting currencies is extremely dangerous, as they move very fast following government and central bank announcements. (As a reminder, in January 2015 when the Swiss National Bank removed the currency peg, stop losses did not work and many traders lost more than they thought they would.)
I don't believe Trump's victory spells the end of the euro or that of the European Union. The main argument of those who say it does is that his victory, so soon after the Brexit vote in the U.K., encourages populist movements across Europe, such as France's Front National, which wants the disintegration of the EU.
Some commentators in the British media now say that Trump's victory will make it easier for the U.K. to get favorable terms for its exit from the EU. The reasoning is that Trump is a big supporter of Brexit and Britain now has a powerful ally in the U.S. that could twist the Europeans' arm.
These arguments are interesting, but they do not take into account a paradox: While it is true that Brexit and Trump are encouraging populists in Europe, they equally may serve as a catalyst among those who are against the populists.
So far, the moderate voice has been missing -- or, to be more precise, drowned --by the shouting on both sides of the argument; at least, this is what happened in the case of Brexit. It was either doom and gloom -- the world will end if Britain leaves the EU -- or Britain will end up invaded by European immigrants and stripped of the last vestiges of sovereignty if it doesn't leave.
What I am saying is that positive discourse has been completely missing from public rhetoric over the past couple years. European moderates -- those who want the European project to succeed -- are now mobilizing to face the danger that it faces.
For too long, Europeans have taken for granted the advantages the EU offers -- passport-free travel, ease of getting a job anywhere in the 28 member states, being able to invest, set up a business or buy a property with minimum hassle, a basic set of shared values.
Many of those who felt uninspired by conventional politicians and did not turn out to vote in previous elections probably will make the effort in future ones as they become more aware that these rights need to be defended.
On the economic front, Trump's victory likely will focus European policymakers' minds on fiscal stimulus in recognition that growth must be given more of a boost. Some commentators in the U.K. note that the new U.S. president could give Britain the upper hand in negotiations with the EU as Trump promised to cut U.S. spending in NATO. The U.K. is the second-biggest spender in the alliance.
But another way to look at it would be that it would force the other countries in Europe to boost their own defense spending, creating new jobs and benefiting European companies such as France's Airbus (EADSY) and Dassault Aviation (DUAVF) or Italy's Leonardo-Finmeccanica (FINMY) and their hundreds of sub-contractors.
Some commentators say investors would be better off buying the British pound (available at a big discount) and shunning the euro. However, the Brexit vote has knocked the British pound off its "safe haven" pedestal and Trump's victory only served to show it is unlikely to regain it soon.
Samuel Tombs, chief U.K. economist at Pantehon Macroeconomics, noted that after the U.S. presidential election result became known on Wednesday, the pound did not appreciate against the dollar and yields on U.K. government bonds went up while bond yields fell in Europe and the euro, yen and Swiss franc all rallied. It shows that investors did not take refuge in the British pound.
This brings me to another point in favor of going long, not short, the euro. The British pound has been used as a reserve currency by central banks across the world due to its stability and liquidity despite the U.K. economy's relatively small size. But post-Brexit, the share of the British pound in world foreign exchange reserves is likely to shrink further; the euro is the easiest replacement.
Donald Trump's remarks about "playing" with the U.S. debt, if confirmed by action, are likely to encourage investors and national central banks to diversify more into other currencies in order to cut exposure to the dollar. Again, the euro is the most likely alternative as it is backed by a big economy and it is a very liquid currency.
The proponents of the theory that Trump's victory spells the end of the euro and of the European Union forget that the opposite equally could be true. His victory may have sparked the ranks of the moderates with the same kind of enthusiasm that fires up the populists.
In front of the European Council of Ministers' building in Brussels there is a beautiful sculpture by Dutch-born sculptor Hanneke Beaumont. It shows a figure carefully balanced and purposefully looking ahead before stepping forward, very slowly but with determination.
At a superficial look, there is nothing that stands out about the sculpture. No fancy shapes, no shocking expression, no wide gestures. You could almost walk past it without noticing it, if you are in a hurry.
But take a closer look, and the subtle optimism of the figure slowly draws you in. That sculpture is the embodiment of the ideal behind the EU. Unassuming, pragmatic and sensible, it is still stepping forward.
