Sunday, May 9, 2010


Europe wants Germany to take the lead in the rescue of the Euro. But the Germans fear that other European nations, who after all to some extent helped in creating the problems through less disciplined monetary policies, will in that case once again 'free-ride' (at least to some extent) by letting the Germans pay the lion's share of the rescue operation.

But betting against the Euro is becoming an international sports now, especially in hedge fund circles. What to do? Today the Germans decided to take the lead. Angela Merkel didn't
seem too happy about it.Why not? Well, Germany is not just the richest economy in the Eurozone. It is also one of the most export-oriented economies. So basically, when the Euro is weaker it will hurt importers but it favors exporters. For instance: German cars and manufacturing goods would become cheaper vis-a-vis their competitors from the US, Japan and Emerging Markets. Not a bad foresight when a  government is faced with the aftermath of a Global Crisis.

Angela Merkel: facing a tough dilemma between taking the lead as monetary watchdog and risking that others in Europe may free-ride once again versus taking a tough stand with Germany probably least affected due to its export sector that would benefit.

And this is the dilemma. Take the lead? Or sit and wait and see what the IMF will do in the end. Merkel had a good partner for brainstorming  sessions: Horst Kohler, the German President, was a former top-level  official at the IMF.Under pressure of the international European
community and probably also indirectly the Americans (a cheaper Euro is  a more expensive Dollar), Germany solved the dilemma by taking the  lead. But as you see, this time round the lack of leadership in Europe is not just a general problem that we saw so often before. This time it  was also Germany's own agenda.

Sunday there are important elections in Nordrhein Westfalen, the richest and most important state in Germany. The outcome might give Merkel some information about domestic consensus in Germany itself as far as the bail-out of Greece  and other weak Euro brothers is concerned.


When analyzing the Euro versus the US Dollar over the last 10 years, we see in the graph below which shows an index of cumulative exchange rate movements that the Euro is still at historically reasonably levels. People talk about a Euro 'crisis' but the level of the currency vis-a-vis the US Greenback is not that worrying. However, it is a fact that the upward trend that existed for the largest part of the period 2001-2008 is definitely broken. The markets seem to translate this into Euro panic. But not even the debts of the weak countries involved (Greece, Spain, Portugal, Ireland and maybe even Italy) are so troublesome that we can assume that we are moving back towards Euro levels similar to the ones in 2000. 

 Euro in a downward spiral? Too early to panic, but the upward trend vis-a-vis the USD is definitely broken since the Global Crisis. In other words: markets trust Gold and the Dollar more when economic times are less favorable. So Europe's new joint currency did not do what some said it would do: provide an alternative to the USD as global safe-haven currency. At least not yet.

Bottom-line: of course it is true that the monetary performance of the aforementioned weaker states has been poor, with Greece as its 'most undisciplined champion'. But the nervousness of today is for a large part related to the aftermath of the Crisis and uncertainty about what markets will look like in the near future. In that new market environment the world is not primarly a game between Europe and the US anymore. Asian developed nations and Emerging Markets want their fair share of the action. That makes the battle more complex and this is also playing an important role in today's exchange rate fluctuations. LMG Emerge advises you not to get too worried until we hit levels of 1 Euro = USD 1.15

Will be continued.

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