Thursday, 4 January 2007

Rumblings of Euro discontent

I wanted to write a piece about the USD and its prospects in 07, something that is going to stay very much on the world’s financial radar.

However, I have been following recent developments in the EU regarding discontent by France and Germany over the Euro. It seems that there are more than trivial Euro related disagreements surfacing between the EU nations, and the different economic situations they each have, some prospering – like Germany – and some suffering a great deal – France and others. The Euro has strengthened a great deal in the last year, and of course this causes some serious trade competitiveness issues. For example, Airbus is having lots of trouble competing in the airline industry because the strong Euro is making them cost ineffective. I don’t know if you have been following the recent airline sales, but Boeing is cleaning Airbus’ clock.

The tension is becoming so great that there are:

  • Reports of Germany and France readying stocks of native (non euro) currencies – in case of – what? Those reports alone made me take a big double take, thinking of what this can mean.
  • French and other officials openly calling for the abandonment of the Euro in the sense of at least re attaining local central bank controls over interest rates. Presently, the ECB sets interest rates for the entire EU region. Believe it or not, there are actually Euro treaty contingencies to allow just that – retaking monetary policy control by nation. Of course, this would cause a lot of inter currency strife as nations compete with interest rate wars in the EU – supposedly having one common currency, but then having different interest rate agendas…basically such a retrograde move by the EU nations would cause a lot of turmoil, and possibly is not even manageable, but could possibly call into doubt the very viability of the Euro.

Remember, the Euro is only about 6 years old, friends….

Which leads me once again to something I have said for some time, the Euro is only 6 years old, and the EU nations are buried in social programs so badly that I envision big Euro trouble. The Europeans are worse off than the US regarding out of control social programs that break their budgets every year, and eat away at any chance of them remaining economic exporters… something France is dealing with in a big way this year.

Of course we keep hearing about the wonderful euro- and nations are all moving more foreign reserves into it… but… something is clearly not right with the Euro model.
In fact, I have big doubts as to the future of the Euro, all financial Euro aggogery aside.
I think gold bulls and people concerned about the USD would do well not to consider the Euro an automatic alternative…..

Now, Germany has had a manufacturing resurgence, is exporting successfully to China. However, this does not necessarily bode well for the Euro. Why? Because other EU nations are definitely NOT benefiting from the constraints a strong Euro is putting on them, and are losing export and general economic market share. Germany’s success will do nothing but cause lots of grief between them and the other more troubled economies….Grief between a successful Germany, the biggest economy in the EU, and other seriously unhappy EU neighbors could spell doom for the common currency.

For example, France had a 14 percent drop in car manufacturing activity in the year ended October. That is simply disastrous. Of course there are calls for a weaker Euro by France, and this is but one example, but a good one of the whole situation.

Here is a good news clip about the situation:

Euro Threatened with 2007 Meltdown, as French Economy Slumps

Peter C. Glover | Bio | 01 Jan 2007
World Politics Watch Exclusive

French Trade Minister Christine Lagarde has recently criticized the German-based European Central Bank (ECB), which, by raising interest rates six times in a year to 3.5 percent, has been instrumental in pushing up the value of the euro. During 2006, the euro rose 11 percent against the U.S. dollar and most Asian currencies, and a staggering 20 percent against the yen. Complaining about only selling one Airbus, and no satellites or ships at all, during the year, Lagarde pointedly told the ECB it needed to stop worrying about inflation and start “thinking about growth.” French Premier Dominique de Villepin even called for limits on the power of the ECB, espousing the need to reassert national control over the economy. “We must clarify matters in exchange rate policy, which means taking back our sovereignty,” he said. A clause in the EU’s Maastricht Treaty (111-4) could allow them to do exactly that. The “get-out” clause allows EU states to set their own interest rates, effectively stripping the ECB of independent control…

Which gets me to my point – I am getting a little concerned about all this ballyhoo about the Euro being the next great currency to ultimately replace the USD. I am concerned that gold bulls and other savings oriented people are being told pretty much a one sided story about the latest and greatest – Euro. The one side we all hear is how great the Euro is, but there are serious issues developing that could deal a death blow to that currency- leaving lots of savers with euros that could drop like a stone in value… all the while these savers thought they had moved into a safe haven.

You know, the USD is toast at some point. However, whether the Euro is the natural alternative clearly remains to be seen. Not only that, but I envision a very severe global recession coming soon, (I’m not the only one, lots of very reputable economists and financial experts are also very concerned about a looming global recession) and that would just immeasurably increase the fracturing pressure on the Euro – not the other way around.

In fact, even though the Euro is gaining lots of ground, if there is a big fracas in the EU over the Euro, and interest rates, I can easily see the Euro dropping like a stone, and losing all the credibility it gained in its short 6 year lifespan. Basically, the Euro has to prove itself for a good amount of time, and this has yet to finish (to say the least), and the EU nations are not exactly well known for getting along with one another economically. If a consensus were to develop that the future of the Euro is in doubt, the Euro will drop like a stone. The fact that there could be movement back to native currencies would be a death blow to the Euro, and I wouldn’t want lots of money in it.

So, even though the USD is in very serious trouble going into 07, I would not necessarily jump with everything into the Euro!

The Prudent Squirrel newsletter is Chris Laird’s weekly macroeconomic gold newsletter. A month or so ago, I predicted the short term gold bear market is over based on the weak USD and the continuing concern in the Mid East. That has proven to be true – holding up gold in spite of weakness in the base metals….

Stop by and have a look.

Christopher Laird