Many investors have been wondering a) how the Euro has remained so strong for the past few years and b) why the ECB has been so slow to combat that strength. One (BIG) reason is that the PIIGS need it to survive. The PIIGS (Portugal, Ireland, Italy, Greece and Spain) are at the root of the Eurozone debt crisis that exploded a few years ago. These countries are so indebted, they need to continue to sell more debt just to service their existing debt (sound familiar?) They need a strong Euro in order to give prospective investors confidence in their trashy bonds and to suppress their yields so they can afford the interest payments (questionable). Thus, a strong Euro is important to the economic livlihood of these countries. Witness the correlation between the Euro and the PIIGS’ stock markets.

The PIIGS Composite (constructed of the 5 aforementioned countries) had basically zero correlation with the Euro over the entire period from 2006 to 2012. Yet, from the July 2012 Euro and Eurostocks bottom (marked by Mr. Draghi’s “whatever it takes” comment), the two have been 91% correlated. As the Euro has rallied during almost that entire time, that has meant strong outperformance by the PIIGS. That is why the ECB has not been too quick to initiate easier monetary policies. In the past few months, there has been increased dovish jaw-boning from them. This has put a dent in the Euro and has sent some of the PIIGS’ stock markets plummeting. This is a development that demands monitoring as it will have ripple effects across global markets.

*UPDATE* Here are the PIIGS stock market drawdowns since the Euro topped in March:

Portugal: -7%

Ireland: -10%

Italy: -8%

Greece: -18%

Spain: -3%