Tumbling euro brings windfall to holiday budgets

The pound has been rising pretty steadily against the euro for more than a year. You could buy 1.22 euros for every pound last summer – and by Christmas the rate had climbed to 1.24, according to figures from Travelex, and since then it has jumped by 10per cent. Anyone exchanging £500 should get around 660 euros, compared with 590 last year – but use a site like money.co.uk to check the best rates.

Sterling has also risen against a range of other currencies. It has more than doubled against the Russian rouble – so for an Easter trip to Russia your roubles would cost half as much as two years ago. Sterling exchange rates against the Norwegian Krona, Australian Dollar and South African Rand are also high.

The strong pound in Europe is largely down to the weakness of the euro. Chris Saint, head of currency dealing at Hargreaves Lansdown, says: “The ECB is printing money on a pretty big scale – 60 billion euros a month until September 2016. When the decision was announced in December the euro fell sharply and has dropped about 15per cent over the past three months.”

Anyone who picked up their holiday cash for an Easter break earlier in the month , when the rate hit 1.40, looks to have done well.

Some commentators predict a further slide in the euro. But if you are planning a trip to Europe in the summer, it might be worth exchanging some of your money now in order to lock into favourable rates. Mr Saint says: “Currency markets can be volatile. They also tend to overreact, so the euro rate could come down as quickly as it went up.”

Brian Jamieson, managing director of Centtrip, says: “Many of our customers are locking in current attractive rates and buying euros to use today or at a later date.”

You can get foreign currency from a bank, building society or bureau de change. You can even exchange money at the Post Office, Marks & Spencer and some of the big supermarkets.

Just about everywhere you will pay “no commission” – because sellers make their money on the exchange rate.

Bob Atkinson, travel expert at MoneySuperMarket, says: ” When buying foreign currency, focus on the total price including charges rather than the exchange rate, and compare the cost of the same amount of holiday cash between providers to find the best deal.

“If you’ve left it too late to organise your cash, then pre-order it for collection at the airport via Travelex, as this will save you a significant amount on airport walk-up rates.”

If you are ordering your currency over the phone or online, watch out for delivery fees. A charge of £5 or so for delivery could wipe out the benefit of a better exchange rate.

An alternative to cash is a pre-paid currency card. You simply load it up with your chosen currency in advance and use it like a debit card when you are on holiday. You can find details of pre-paid cards on price comparison websites, but CaxtonFX, FairFX and Ukash often come out well.

Again, you should look for a card with a decent exchange rate. Watch out for fees, too. Many cards charge an application fee of up to £10. Some cards also levy a fee for each transaction. Fees for cash withdrawals at an ATM are common. You might even be penalised with an inactivity charge if you don’t use the card for a certain period.

Karen Harkin of Asda Money, which runs its own currency card, says it allows holidaymakers choose when they buy their travel money, loading currency onto it over time, rather than at one go. Rates are locked at the time of purchase and holidaymakers can use it in the same way as a credit or debit card. The Asda card has no fees for ATM withdrawals.

Myles Stephenson, chief executive of MyTravel Cash said cash loading onto its prepaid Euro Currency Card was up more than 45 per cent so far this year compared to early last year.

When it comes to using cards abroad, it pays regular travellers to apply for a credit card such as Halifax Clarity (open to all) or Nationwide Select (open only to Nationwide current account customers), which do not charge transaction fees for purchases abroad.

If you do have to use your normal credit or debit cards, be sure to make payments in the local currency instead of paying in pounds. This can save up to 5 per cent of hidden extra cost.

Mr Atkinson says: “Make sure your card provider knows you are travelling overseas or you may find your transactions are blocked. If you are lucky enough to return home with unused spending money, you have a few options. You can keep it until your next trip if it’s a popular currency, or try and sell it to a friend at the rate you bought it. If you do need to sell it back to a provider then shop around for the best rate, and remember to focus on the total amount you’ll get back, rather than the rate and charges.”

Another week, another euro fall

The plunge in the euro may be starting to look overstretched, but that’s unlikely to stop traders from pushing the battered single currency even lower this week, analysts warned.

The euro briefly fell to a fresh 12-year low against the dollar Monday, at about $ 1.0457, before recovering a touch. Last week, the currency slid 3.2 percent — its biggest weekly fall since 2011 — as the European Central Bank embarked on a 1-trillion-euro quantitative easing program and talk of a rate rise by the U.S. Federal Reserve this year grew.

“The euro continues to track lower and while it continues to struggle above the $ 1.0600 level, the prospect of a move to parity remains very much a possibility,” Michael Hewson, chief market analyst at CMC Markets, said in a note.

“The move lower continues to get more and more overextended, yet new lows continue to be hit every day.”

Read More Weak euro, ECB stimulus make Europe a solid bet: Wisdom Tree

Strong Dollar, Weak Euro: How the Currency Shift Is Hitting Companies

(Bloomberg) — Emerson Electric Co., which says it prides itself on solving its customers’ toughest challenges, is having to overcome a conundrum of its own: how to make the strong dollar and a weakening euro work in its favor.

One solution devised by Chief Executive Officer David Farr is to shift more manufacturing to countries with a depressed currency. Missouri-based Emerson, which makes industrial measuring and manufacturing gear for customers in the oil, packaging and automotive industries, will bolster output in Mexico and parts of eastern Europe to cushion the fallout from the strong home currency, Farr said.

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The picture couldn’t be more different in Europe, where the single currency’s plunge to a 2003 low is fattening revenue at companies from Siemens AG to Deutsche Post AG. On its lucrative North American routes, Deutsche Lufthansa AG is targeting U.S. customers who have more buying power with the stronger dollar. With the euro approaching a record quarterly decline versus the dollar, European stocks are also becoming more attractive, a survey of investor relations executives by Bloomberg Intelligence found.

“If the dollar stays the way it is, big industrial companies like Siemens benefit from a bit of a tailwind, because the weak euro boosts the sales of our products, absolutely no question,” said Siemens Chief Executive Officer Joe Kaeser, whose German company competes with Emerson.

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Currency Obstacles

A weaker euro lowers the cost of exports from the euro region while making U.S. goods more expensive. European companies selling in the U.S. also earn more when they translate those sales back into their home currency, while U.S. companies garner fewer dollars from their sales in euros.

For example, U.S. clothing retailer Abercrombie & Fitch Co. has the most at stake in its industry because it gets 27 percent of sales from Europe, according to Poonam Goyal, a Bloomberg Intelligence analyst. The euro’s weakness sliced 2.7 percentage points from fourth-quarter sales, the New Albany, Ohio-based company said this month.

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The retailer, already struggling in its home market after falling out of favor with young shoppers, said currency exchange rates “are expected to be a significant headwind to our results in 2015.” Last year’s sales would have been about $ 135 million less at today’s currency rates, according to Chief Financial Officer Joanne Crevoiserat.

The contrary effect of the euro slump is evident at Deutsche Post, Europe’s largest postal service. Currency translations cut 828 million euros ($ 873 million) from the Bonn-based company’s revenue in the first half of last year but as the euro fell in the second half, foreign-exchange effects added 421 million euros in sales, according to data compiled by Bloomberg.

ECB Intervention

That trend is continuing in 2015 as the euro has weakened 13 percent against the dollar to $ 1.0544. The currency may reach parity with the dollar by the end of the year, Deutsche Bank AG strategists said last week, versus their previous forecast of $ 1.05. The last time the euro and dollar were equal was in 2002, the year euro notes and coins began to circulate publicly.

The European Central Bank spurred renewed declines in the euro with its plan, begun last week, to buy government bonds. The euro has slumped 7.9 percent this year, the most among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar, the best performer, has gained 7.9 percent and the yen advanced 6.3 percent.

“Earnings of U.S. stocks rose almost twice as fast as those of European companies in the past 15 years,” said Stefan Kreuzkamp of Deutsche Bank’s Asset & Wealth Management business. “Some of that gap may be due to the weak U.S. dollar in that period, and that tailwind may now reverse and turn into a boost for earnings in Europe.”

Currency Hedging

The euro’s slump also is cushioning Europe’s biggest oil and gas producers from the decline in crude prices. France’s Total SA, Italy’s Eni SpA and Repsol SA of Spain will benefit the most, according to data compiled by Bloomberg Intelligence. The companies pay a large chunk of salaries, rent and other costs in euros, while earning revenue from oil and gas sales in dollars — the industry’s dominant currency.

Still, in the short term, the gains may be relatively limited, as companies typically hedge against major currency fluctuations, Siemens CEO Kaeser said. Farr, his counterpart at Emerson, said on a Feb. 19 conference call that countries around the world are in the process of “changing their competitiveness” by devaluing their currency. Emerson’s shift of manufacturing capacity to Mexico and eastern Europe didn’t result solely from the dollar’s strength, but it is one factor, a spokesman said.

In the U.S., medical-device companies will see their earnings cut by an average of 6 percent because of the strength of the dollar, according to Bloomberg Intelligence. While St. Jude Medical Inc. will take the biggest hit, the St. Paul, Minnesota-based company plans to implement hedges to offset the impact, leaving Abbott Laboratories as the most exposed, BI’s Jason McGorman said in a note.

Deal Frenzy

The impact of the euro’s plunge may extend beyond earnings. The drop will make acquisitions in Europe more affordable for U.S. companies and thus may spur dealmaking, while U.S. companies aiming to sell European assets may hold off until the euro appreciates.

Last month, Ball Corp., a U.S. maker of beverage cans, agreed to buy London-based Rexam Plc for $ 6.8 billion, less than it would have cost a year ago thanks to the relative strength of the dollar and U.S. stocks against their European counterparts.

The euro is positive for the European companies, with the effect visible in rising share prices, said Deborah Aitken, a luxury-goods analyst at Bloomberg Intelligence in London. The Euro Stoxx 50 Index of companies in the euro region has surged 16 percent this year, while the Standard & Poor’s 500 Index of U.S. companies has fallen 0.3 percent.

Luxottica, the world’s largest eyewear maker, is among those benefiting.

“Our expectation for 2015 is that currency will generate tailwinds in our results both top and bottom line,” Chief Financial Officer Stefano Grassi said on March 3. “And obviously, we’re very excited about that.”

To contact the reporters on this story: Phil Serafino in Paris at [email protected]; Richard Weiss in Frankfurt at [email protected]; Alex Webb in Munich at [email protected]

To contact the editors responsible for this story: Jacqueline Simmons at [email protected] Benedikt Kammel, Thomas Mulier

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Dollar-euro parity: What a one-to-one exchange means

As the euro’s value sinks, the dollar-euro parity could affect your plans: whether you are investing in foreign markets or just planning a spring vacation in the south of France.

The strong greenback against plunging euro prices means there could soon be a one-to-one exchange rate between the currencies. And the magical state of parity is a significant marker not only because it eliminates the cost of exchanging money-but also because it is a rare occurrence.

The last parity moment was in November 2002. Parity also occurred when the euro was introduced in 1999, and in 2000. So why now? The two currencies getting cozy signifies an ongoing trend in changing money supplies and disparate central bank policies between the United States and the European Union.

Read More $ 40 million says the euro will keep cratering

Because the United States and euro zone have floating exchange rates, the price of money is set by the market, not a government: supply (from the central bank) and demand for the currency.

Demand fluctuates based on factors including the expected inflation or deflation of the currency over time, the perception of a country as a stable place to hold valuable assets, the level of currency reserves needed for purchases, and interest rates.

The euro is getting weaker because we know the supply will go up. The European Central Bank has started an aggressive economic stimulus in the form of quantitative easing -in which it is buying bonds off the public-private markets in exchange for cash. Those purchases will flood the market with euros.

In fact, that’s the goal. Like the United States did, the European Union hopes to keep money cheap and accessible to its residents to spur economic growth.

But by the law of supply and demand, when there is more to go around, each euro is worth less. A glut of euros is particularly important because currency is seen as a store of value. Like we count on investments to create a return, we count on cash to buy as much as it did yesterday, minus a tiny but predictable amount of inflation each year.

Because the euro is becoming less valuable and has less purchasing power abroad, it’s not seen as a valuable way to hold assets, meaning that people may dump euro-denominated assets for an asset with more return.

As a result, the dollar is being seen as a more stable alternative to the euro and has relatively more purchasing power abroad. Compounding the situation, while rates of return in Europe spiral downward, the Federal Reserve is planning to raise interest rates and reduce the money supply-meaning that dollar-denominated assets will become more valuable.

American businesses that operate in Europe could feel the strain of dollar-euro parity because it means that it is relatively more expensive to buy their products. It also means that when U.S. companies bring their earnings back across the Atlantic, they dilute their euro-denominated earnings, which are now worth less than they used to be.

Even earlier in 2015, as the dollar strengthened and the euro weakened, multinational corporations like Procter & Gamble (NYSE: PG) and Caterpillar (NYSE: CAT) blamed the strong dollar for disappointing earnings.

While a rising dollar hurts U.S. businesses selling exports, it helps consumers looking for European imports.

If you’re throwing around the idea of buying a villa in Tuscany, now’s your chance. When the cost of exchanging money is eliminated, it will make any purchase in Europe relatively cheaper. Prices of goods can’t readjust right away to keep up with foreign demand. Those Haribo bears are priced for the locals, which mean you can get a steal.

Read More It’s time for that European vacation

No one knows for sure, but it’s likely that the moment of parity-the golden one-to-one ratio-will be brief. The overall currency trend of a beefy dollar and weak euro, however, may be more long term.

With Greece and Germany squabbling over the sluggish economy and a Fed decision to raise rates looming, the forces that are driving a wedge between the demand for euros and dollars may carry on for a while.

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Euro/dollar shock forces rethink across world markets

* Scale of market shock is “hard to fathom”

* Some now forecast euro will slide below dollar parity

* Funds flood into European stocks

* U.S. firms exploit low yields to borrow in Europe

* U.S. M&A flows into Europe highest since 1970s

By Jamie McGeever

LONDON, March 11 (Reuters) – The euro’s accelerating slide towards parity with the dollar and beyond has caught investors and multi-national firms off guard, forcing scrambled revisions of long-range forecasts and a major strategic rethink across global markets.

The euro/dollar rate, which channels almost a quarter of the$ 5 trillion that flows daily through world currency markets, has been falling steadily for months, as markets factored in the European Central Bank’s 1 trillion euro stimulus plan which finally began this week.

This has coincided with the slide on energy markets. “It is hard to fathom the scale of shock being inflicted in slow-motion on global markets currently,” Gerry Fowler, head of global equities and derivatives strategy at BNP Paribas. “Twenty-five percent currency weakening and a 50 percent decline in oil prices in the space of seven months might be unprecedented.”

While the euro’s fall began in slow motion, its gathering speed this month has led to sharp swings across most asset classes while investors reconsider how capital flows across borders will pan out.

Only a week ago, Reuters polls showed a consensus among more than 60 currency strategists that the euro would appreciate to $ 1.12 in a month and then to ebb to $ 1.08 in a year.

Yet on Wednesday, the euro fell to $ 1.0560, its lowest in 12 years. Losses of more than 12 percent so far this year put it on track for its biggest ever quarterly loss.

Deutsche Bank said on Tuesday it now expects the euro to fall as low as $ 0.90 next year and $ 0.85 in 2017.

Conversely, the dollar index, a measure of the greenback’s value against six major currencies, is up 10 percent so far this year as the U.S. Federal Reserve gears up for its first interest rate increase in nine years, just as the ECB is easing by printing money to buy euro zone bonds.

This would mark the dollar’s best quarter since 1992 and fourth best since the Bretton Woods system of fixed exchange rates was abolished in the early 1970s.

The yawning long-term interest rate and yield gap opening up between Europe and the United States has been the driving force. All German government bond yields out to seven years’ maturity are negative and, remarkably, it costs Germany less to borrow for 30 years than the U.S. Treasury for two years.

Thirty-year U.S. government bonds are now yielding over 200 basis points more than German equivalents for the first time, more than twice the premium just a year ago.

“There are not many places for investors to hide,” said Nikolaos Panigirtzoglou, managing director of global asset allocation at JP Morgan in London. “If high return is your objective, you need to take equity risk.”


The weak euro makes euro zone equities comparatively more attractive than U.S. stocks, initially by making them cheaper in dollar terms. Thereafter, investors hope European companies will outperform thanks to a more advantageous exchange rate for exporters outside the region, a trend that should become entrenched if the ECB’s stimulus has the desired effect of reviving growth and inflation.

The effects are already being felt. The S&P 500’s 1.7 percent slide on Tuesday pulled the index into the red for the year while the EuroStoxx 50 index of leading euro zone shares is up 15 percent on the year.

Inflows into European equities since mid-January have been a sizable $ 27 billion. But outflows in the second half of last year were $ 48 billion, suggesting the $ 21 billion gap means there is still “notable” potential for further inflows, according to Barclays.

A rising dollar eats into the overseas earnings of U.S. companies and makes U.S. exports more expensive on global markets. Even the White House has waded in, with Council of Economic Advisers Chairman Jason Furman saying on Tuesday that the surging dollar is a headwind for U.S. growth.

The evaporation of euro debt yields thanks to the ECB’s bond purchases, on top of the currency moves, is also encouraging a flood of U.S. firms to raise funds in euros instead of dollars.

So far this year U.S. corporate debt issued in euros has totalled 33.9 billion euros, according to Thomson Reuters data. That’s more than three times the 9.8 billion from the same period last year and the highest since the same period in 2007.

This trend could continue if the Fed raises rates. “It is highly possible that you could see more U.S. companies coming to Europe to issue debt simply because of the way interest rates are getting lower over here,” said Dennis Jose, director of global and European equity strategy at Barclays in London.

U.S. companies are also the engine of the biggest surge in merger and acquisition (M&A) flows into Europe since the 1970s.

These have totalled $ 73.4 billion this year, according to Thomson Reuters data, the highest year-to-date figure since records began in the 1970s. U.S. companies account for almost 40 percent of this that, more than doubling in value from last year to $ 27.9 billion.

(Reporting by Jamie McGeever, additional reporting by Lionel Laurent and Mike Dolan; editing by David Stamp)

Carmakers to gain most from weak euro

On Wednesday, Moody’s said it had lowered its forecast for the euro-dollar exchange rate to 1.10 through 2015 and 1.13 in 2016, adding that it did not expect any major recovery in the single currency before 2017.

“In general, a weaker euro boosts the price competitiveness of euro area exports, which account for about 25 percent of Europe’s gross domestic product,” the ratings agency said in a research note.

“However, a lower euro exchange rate will raise import prices and increase the cost of inputs that are denominated in currencies other than the euro.”

Moody’s said the low euro would prove “mildly negative” for non-food retailers, while airlines would suffer the most.

“While demand for flights to Europe might increase, driven by the rising popularity of euro area destinations, most of this rising demand will be captured by non-European airlines,” it said.

“In addition, flying from Europe to other continents will become less attractive. Furthermore, the positive effect of falling oil prices will be partially offset by the weakening euro, as global oil prices are quoted in U.S. dollars making fuel purchases more expensive for European airlines.”

In a February research note, Goldman Sachs Asset Management said the weak euro could boost revenues for many of the region’s companies.

“With 54 percent of aggregate corporate revenues being generated outside of Europe, we look for a weakening euro to benefit the competitiveness and profitability of many European companies through a more competitive export business and higher profits when converting overseas profits back into the local euro currency,” the bank said.

BMW anybody? Carmakers to gain most from weak euro

European carmakers (STOXX: .SXAP) and chemical (STOXX: .SX4P) and tourism companies stand to benefit most from the weakening euro, according to Moody’s, while the airline sector looks set to be worst hit.

The credit ratings provider said the falling euro (Exchange: EUR=) would be “positive for companies that have the majority of their cost bases in the euro area with significant sales to regions outside it.”

These included German premium auto manufacturers such as BMW (XETRA: BMW-DE), Daimler (XETRA: DAI-DE) and Volkswagen (XETRA: VOW3-DE), which export a large share of their production to external markets including the U.S.

Germany companies were also seen as the major beneficiaries in the chemicals sector, with Moody’s naming K&S (XETRA: SDF-DE) and Lanxess (XETRA: LXS-DE) as those most likely to gain, given that potash and synthetic rubber are “typically U.S. dollar markets.”

Moody’s added that the hotels and tourism sector would also receive a boost, due to increased demand as euro area destinations became cheaper for travelers from overseas.

Read More Weak euro boosts region’s business growth

Since the start of last year, the euro has fallen by around 12.5 percent again U.K. sterling (Exchange: EURGBP=) to £0.73 on Wednesday. It has slipped 19 percent against the U.S. dollar to $ 1.11.

On Wednesday, Moody’s said it had lowered its forecast for the euro-dollar exchange rate to 1.10 through 2015 and 1.13 in 2016, adding that it did not expect any major recovery in the single currency before 2017.

“In general, a weaker euro boosts the price competitiveness of euro area exports, which account for about 25 percent of Europe’s gross domestic product,” the ratings agency said in a research note.

“However, a lower euro exchange rate will raise import prices and increase the cost of inputs that are denominated in currencies other than the euro.”

Moody’s said the low euro would prove “mildly negative” for non-food retailers, while airlines would suffer the most.

“While demand for flights to Europe might increase, driven by the rising popularity of euro area destinations, most of this rising demand will be captured by non-European airlines,” it said.

“In addition, flying from Europe to other continents will become less attractive. Furthermore, the positive effect of falling oil prices will be partially offset by the weakening euro, as global oil prices (Intercontinental Exchange Europe: @LCO.1) are quoted in U.S. dollars making fuel purchases more expensive for European airlines.”

In a February research note, Goldman Sachs Asset Management said the weak euro could boost revenues for many of the region’s companies.

“With 54 percent of aggregate corporate revenues being generated outside of Europe, we look for a weakening euro to benefit the competitiveness and profitability of many European companies through a more competitive export business and higher profits when converting overseas profits back into the local euro currency,” the bank said.

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FOREX-Dollar eases after touching 11-year peak

* Euro little changed after drop against dollar

* Dollar rise against yen stalls on Abe adviser’s comments

* Traders position for ECB bond-buying, U.S. jobs report (Adds latest prices and quotes; changes byline and dateline; previously LONDON)

By Michael Connor

NEW YORK, March 3 (Reuters) – The dollar softened on Tuesday after touching an 11-year high against an index of other major currencies as dealers awaited details of Europe’s massive bond-buying program and a key U.S. jobs report.

Trading was choppy. The dollar surrendered early gains against the euro on widening interest-rate differences and was last flat against Europe’s shared currency and down against the Japanese yen.

The U.S. dollar index was off 0.17 percent at 95.305 after rising to a peak of 95.570 last seen in September 2003.

“Markets are looking for the next impetus,” said Dean Popplewell, chief currency strategist at Oanda in Toronto. “We may get that from the European Central Bank on Thursday or a pleasant spark on Friday from the non-farm payroll report.”

Europe’s central bank will finalize the details of its 1.1 trillion euro bond-buying program on Thursday and may start buying immediately afterwards.

On Friday, the U.S. government releases its often market-moving monthly employment report, which economists expect to show a robust addition of 240,000 jobs during February, according to a Reuters poll.

The euro was last little changed against the dollar at $ 1.1181.

The dollar fell against the yen after an economic adviser to Japanese Prime Minister Shinzo Abe said the U.S. currency could not sustain more gains.

Etsuro Honda, whom some analysts described as a proponent of yen weakness, told the Wall Street Journal that the dollar’s strength against the yen might be at a “kind of upper limit in the exchange rate’s comfort zone.”

The comments pulled the dollar off a three-week high of 120.27 yen hit earlier due to a spike in U.S. debt yields. It last traded at 119.55, down 0.5 percent.

The Australian dollar rose 1 percent against the greenback after the Reserve Bank of Australia opted to leave its policy rate unchanged at a record low of 2.25 percent. The Aussie jumped to a high of $ 0.7845 before easing back to $ 0.7833, still up 0.8 percent on the day.

(Reporting by Michael Connor in New York; Editing by Lisa Von Ahn)

Despite Greece, euro zone is turning the corner

By Paul Taylor

LONDON (Reuters) – The latest episode of Greece’s debt crisis has revived doubts about the long-term survival of the euro, nowhere more so than in London, Europe’s main financial center and a hotbed of Euroskepticism.

The heightened risk of a Greek default and/or exit comes just as there are signs that the euro zone is turning the corner after seven years of financial and economic crisis and that its perilous internal imbalances may be starting to diminish.

To skeptics, the election of a radical leftist-led government in Athens committed to tearing up Greece’s bailout looks like the start of an unraveling of the 19-nation currency area, with southern countries rebelling against austerity while EU paymaster Germany rebels against further aid.

A last-ditch deal to extend Greece’s bailout for four months after much kicking and screaming between Athens and Berlin did little to ease fears that the euro zone’s weakest link may end up defaulting on its official European creditors.

U.S. economist Milton Friedman’s aphorism – “What is unsustainable will not be sustained” – is cited frequently by those who believe market forces will eventually overwhelm the political will that holds the euro together.

Countries that share a single currency cannot devalue when their economies lose competitiveness, as occurred in southern Europe in the first decade of the euro’s existence. There is no mechanism for large fiscal transfers between member states.

So the only option has been a wrenching “internal devaluation” by countries on the periphery of the euro area, involving real wage, pension and public spending cuts and mass unemployment that has caused deep social distress.

Austerity has fueled radical forces of political protest and may be running out of democratic road – not just in Greece – but none of the alternative ways out of the euro zone’s economic divergence dilemma looks remotely plausible.

“The history of the gold standard tells us that an asymmetric adjustment process involving internal devaluation in debtor countries, with no corresponding inflation in the core, is unlikely to be economically or politically sustainable,” economic historians Kevin O’Rourke and Alan Taylor wrote in the Journal of Economic Perspectives in 2013.

“What is desirable for the euro zone may not be feasible.”

Germany has so far been unwilling to see either higher inflation, debt forgiveness, issuing common euro zone bonds or cross-border fiscal transfers. There is scant support anywhere for closer political and economic integration of the euro area.

“The strategy of the euro zone has been to wait for something to turn up,” says a senior figure in the British financial establishment, who observed the euro zone crisis from close up but outside.

“In the 1930s, World War Two turned up. Maybe something else will turn up,” he said, speaking on condition of anonymity.

The European Central Bank has acted at key moments to hold the euro zone together, vowing in 2012 to do “whatever it takes” to save the currency and now launching a massive program of buying government bonds to spur the economy and avert deflation.

ECB action can only buy time for governments to implement structural economic reforms that could close the competitiveness gap by raising potential growth over time. But countries like France and Italy largely failed to use that breathing space in 2013-14 to shake up labor markets, pension and welfare systems.

Yet things can go right as well as wrong.

A nascent cyclical recovery in the euro zone, aided by lower oil prices, a weaker euro and ECB money-printing, may narrow the imbalances that have led skeptics to predict the euro’s demise.

Ireland and Spain, which have been through the wringer of austerity programs and structural reforms in return for European assistance, are now the fastest growing economies in the currency bloc. Portugal too is perking up.

German wages are rising faster than prices, giving a boost to consumer spending and raising the prospect that inflation in the bloc’s biggest economy may outpace the rate in southern Europe for several years. That would make economic adjustment more symmetrical, and less agonizing for the south.

There are also signs that France and Italy, the euro zone’s second and third largest economies, are finally tackling some of the economic reforms that politicians long feared to touch, albeit at a slow and gradual pace.

French President Francois Hollande’s government has just rammed through a bill to loosen some shackles on business such as Sunday trading and plans new steps to ease labor regulation.

Italian Prime Minister Matteo Renzi has introduced a jobs act to ease hiring and firing and is making progress on reform to streamline parliament and the electoral system.

“Spain shows that reform is possible to create a growth environment and significant job creation,” said Luigi Speranza, co-head of European economics at BNP Paribas bank in London. “The return of growth could make it easier for Renzi to make reforms in Italy, and Hollande in France.”

 The European Commission’s budget leniency for Paris and Rome may assist that process by rewarding them for planned growth-enhancing reforms with more time to cut their deficits and debt.

Another encouraging sign is that lending to businesses in Italy and Spain is picking up following last year’s ECB stress tests of European banks and their interest rates are falling, narrowing the gap with the euro zone core.

“What worries me is that some of the factors behind the rebound are temporary,” Speranza said. “Structural reforms could make that more sustainable and build confidence.”

A Greek default or exit from the euro zone – whether by “Grexident” or intention – could shatter that returning trust, even though Athens accounts for just two percent of the bloc’s economy. So Greece’s fate remains entwined with the euro’s survival.

(Writing by Paul Taylor; Editing by Stephen Powell)