Euro Currency

America has a new export: “bailout economics.”

This Monday, Europe announced a $1-trillion plan to rescue debt-laden governments within the Euro-zone.

The problem is the writing is already on the wall for the euro currency. Expect it to hit parity with the dollar, as the market realizes that, despite the bailout, the prospects for the single currency aren’t good.

Traders are already placing bets that the euro will continue its decline versus the dollar. According to UBS and Barclays, the euro is heading for $1.20 over the near term.

There are three very good reasons to stay clear of the euro right now.

First, the austerity measures the EU and IMF are trying to extract from the debt-laden PIIG nations will exert a serious drag on Euro-zone growth. Swinging cutbacks will pressure private sector balance sheets sooner than either the IMF or the EU realizes.

Second, the ECB is likely to keep interest rates as low as possible for an extended period in an attempt to keep the Euro-zone economy afloat. That means we could see rates rise in the U.S. while Euro-zone rates stays ultra low. This is bullish for the dollar and bearish for the euro.

Lastly, German and French banks have already starting buying Euro-zone bonds on the open market. They are effectively using the printing presses to support the sovereign bond market and keep bond yields from rising. This may help inflate away Europe’s debts. But it will drive down the value of the euro.

The euro is already falling, just one day after the giant rescue package. This shows that the market still has little faith in the single currency.

This from Bonner & Partners Family Office senior analyst Charles Delvalle:

“This is really bad news for the euro. You’d think the prospect of unity would push the euro higher. But the market has quickly realized that Europe is going to be tightening its belt for years. That means interest rates will stay low for a long time. The U.S. has now has a chance to erase the euro’s interest rate advantage.”

The problem with bailout economics is that it only serves to paper over the economy’s structural problems; it does nothing to fix them. Greeks still have to cut back on spending…the Spanish still have to admit they have a debt problem…and the bond market still has to have faith that the underlying difficulties facing Euro-zone countries are surmountable.

A flashy bailout can lift spirits over the short term, as we saw yesterday in European and U.S. stock markets. But if the market doesn’t have faith the structural problems can be effectively tackled, ultimately the bailout is good money thrown after bad.

My analysis remains the same: Weakness in the Euro-zone will persist. The euro will continue to head south versus the dollar. European vacations will remain cheap for Americans and Canadians.

There’s never been a better time to plan that European trip.