Markets are far too optimistic – the euro's surge can't last

But hold on. In fact, the markets are getting this wrong. The euro’s surge is only temporary. Why? Because the upturn in growth is largely illusory. Because all the political risk will soon be back on the table. And because the weakening of the dollar will fade – and when it does, the euro will back under pressure again. It is not going to rescue anyone’s wallet this year, but the rally will collapse far more quickly than anyone expects.

In January, 2017 was billed as the year the euro might well hit parity with the dollar, if it did not collapse completely. A series of elections, following the trend set by Brexit and Trump, would sweep populist parties to power, creating conditions for one or more countries to splinter away from the zone. Even if it did not come to that, the region’s depression, combined with an ascendant dollar, would put inexorably downward pressure on the currency.

That seems a long time ago now. The election of Emmanuel Macron in France, the almost inevitable ­re-coronation of Angela Merkel in Germany next month, a renewed commitment to reform, and a return to growth, have all combined to make the currency unexpectedly strong.

From a low of $1.04 to $1.18, the euro keeps on rising. And yet, in truth, the euro’s surge can’t last. The markets may well have been too pessimistic in January. Right now, however, they are way too optimistic. There are three big reasons why the rally will soon be over.

First, the return to growth across the Continent is largely illusory. True, in the latest quarter the zone expanded by 0.6pc, its fastest rate since 2011, following on from 0.5pc in the first three months of the year (which was a lot better than the 0.3pc we managed in the UK). The euro area as a whole should comfortably grow by more than 2pc this year, and Germany, and most of all Spain, will do a lot better than that. Heck, even Italy has started expanding again. The threat of deflation has lifted, and unemployment has finally started to fall.

But there is a catch. Under the bonnet, the engine is still not in great shape. Over the past two years, the European Central Bank has launched a blitz of quantitative easing, printing money on a scale that makes the Japanese look relatively restrained by comparison. It has chucked 2.2 trillion of freshly printed euros at the economy, almost as much, on a per capita basis, as the Federal Reserve at the height of the 2008 crash and a lot more than the Bank of England – and it is still adding €60bn (£55bn) a month.

If that doesn’t get you 2pc growth – that’s a trillion for every percentage point, remember – it is hard to know what does. But when QE gets wound up, that growth will evaporate. The fundamentals are no better – and with an extra layer of taxes suggested by Macron, coupled with an increasingly hysterical protectionism, possibly worse.

Second, the politics has quieted down, but as any sailor will tell you, a lull is not the same as reaching a safe harbour. The “Merkron” axis has stabilised the zone, and there is talk of reform, including a finance ministry with its own budget for the zone. If it happened, it would certainly help.

Everyone agrees that the euro was left half-finished, and it needs some way of redistributing money and demand across the continent. The trouble is, while everyone can sign up to vague platitudes about “unity”, when it comes to detail, no one will agree to anything. All a finance ministry will do is impose more years of grinding austerity. Once it becomes clear that meaningful reform is impossible, all the old political risks will be back on the table.

Finally, the dollar’s decline will quickly end. Right now, Donald Trump’s chaotic presidency has put a stop to a bull run that lasted several years. No one thinks the Donald is about to start running the country more sensibly. But once investors see the Fed continue to tweak rates upwards, and the economy growing at a respectable rate, they will be supporting the American currency once again.

You can throw in a few more risks as well. Greece. A fresh crisis is seldom far away. Right now, the euro is benefiting from a cyclical upswing fuelled by printing money on a massive scale.

But that won’t last much longer. And the euro is likely to end the year closer to where it started than $1.30, although not in time to ease the pain of a holiday this summer.