Merkel’s Exit Might Help Boost the Euro

(Bloomberg) -- One of the most bullish forecasters on the euro is emboldened by the political decline of German Chancellor Angela Merkel, so long a force of stability in the region.

Analysts at Morgan Stanley say that the common currency may reach $1.32, drawing strength from factors including a possible political outcome in which Friedrich Merz succeeds Merkel as leader of the Christian Democratic Union. While Merz, head of BlackRock Inc.'s German asset management unit, would mark a shift to the political right, he is seen as being more in favor of euro-area integration. That will help boost the euro, according to Morgan Stanley.

In an open letter published in the German newspaper Handelsblatt last month, Merz was among signatories calling for European-wide unemployment insurance and a “budgetary policy for the euro zone, which serves the cohesion and sustainability of the whole euro area.” They also called for Germany to work with French President Emmanuel Macron to strengthen the European monetary union.

Merz “has positioned himself with a pro-EMU integration agenda going well beyond Merkel's position,” wrote Hans Redeker, global head of foreign-exchange strategy at Morgan Stanley. “If this debate transpires into concrete core EMU policy action, the EUR is likely to break sharply higher,” Redeker said, referring to the euro-dollar exchange rate.

Bullish forecast

Morgan Stanley analysts, who predicted at the start of the year that the euro would climb to $1.33 in 2019, now forecast it will reach $1.32 by the end of next year, a level not reached since August 2014. That prediction makes the U.S. bank the most bullish in a Bloomberg survey, and compares with a median forecast of $1.25.

Should Germany adopt a stance more closely aligned with Macron's, it could mark a turnaround for a currency that has languished in recent months as economic growth has slowed and worries surrounding Italy's budget have weighed. Morgan Stanley argues that increasing populism within the region may actually boost the case for further integration, rather than diminish it.

The euro hovered around $1.1400 in London Tuesday, having dropped to $1.1302 on Oct. 31, close to the lowest level in more than a year.

The lack of progress on euro-area integration and increasing euroskepticism among member states have helped jeopardize the attempts of policy makers to make the euro a reserve currency to rival the dollar in recent years. The currency has lost almost a fourth of its value since before the region's debt crisis in 2011.

Merkel announced last week that she is set to quit as head of the CDU and won't run for another term as chancellor when her current tenure concludes in 2021. Contenders to succeed her will campaign ahead of a party convention in December, with her replacement as party chief helping to determine whether she can stay on as chancellor.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Keith Jenkins, Anil Varma

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