Sv: More on the Euro

["Hugh Whinfrey" <econ@xxxxxxxxxxxx>]

Henry Liu writes:

<snip>
>Yet the euro keeps falling, to below 90 cents, almost 25% below its launch
>value. Parity with the dollar, oringinally an unfarthomable decline, now
>appear an impossibly high target.  The fall of the euro has shifted from a
>political embarrassment to a real economic problem and onto a political
>crisis centered on the survivability of the common currency.  All hopes of
>the euro challenging the dollar is the prime trade currency have vanished,
>as least for the near future.

Not sure I follow you there Henry. The English language press is certainly
calling it a 'political crisis'.  Unfortunately, they're just observers and,
moreover, not particularly influential in the non-English-speaking parts
of Europe. I'm quite prepared to stoically watch it go down to 0.70 to the
dollar if it means an end to US financial hegemony. I'm not the only one
here in Europe who sees it that way either.  Note Greece was just accepted
into the common currency.  Here in Denmark, there is a national referendum
scheduled on joining it later this year.  Odds are it will pass in the end,
although it will probably not be clear until the votes are actually counted.

>The falling euro has helped exporters but it is now getting to the point
>of causing import-induced inflation.  Voices from George Soros

Soros recently lost his shirt by betting on the Euro against the dollar.
Of course, his call for ECB support might conceivably have been out
of altruistic motivations. :-)

>to the the
>chief economist of the Deutsche Bank  are calling for ECB intervention to
>keep the euro above 90 cents, by selling part of its US$250 billion dollar
>reserves.  But the influential German central bank doubts effective
>intervention can be orchestrated, given US policy.


I think it goes deeper than that. There are 2 'games' being played. The
loser will be the one who panics first and lets the other central bank call
the shots. Moreover, the renowned abrasiveness of Sec. Summers is
probably not a leading indicator of co-ordinated moves in the near future.

The US is in an unsustainable position, and seems to betting
the house on its ability to get the ECB to panic.  I wouldn't look for
serious intervention by the ECB until the US stockmarket bubble pops,
at which point massive ECB selling of dollars might send a very clear
message about who's in charge and who isn't.

>
>The fall of the euro is a monetary enigma. Eurozone enjoys a growth rate
>of 3.4% (albeit below the US's 5.4%), a high pace by historical standards
>and emiminently respectable. Employment is rising while inflation is below
>that of the US. Investment is robust and there is a trade surplus compared
>to the huge US trade deficit of close to US$300 billion.

'Monetary enigma' hits the nail on the head.  I would suggest that there
may be forces at work other than what is alleged in the English
language press to be 'political instability'.  There is no other way to
explain all the 'elephant footprints' in the markets while maintaining
a politically neutral stance.

>
>It seems that growth differential has become the driving force of a market
>that sells the good to buy the best.  This is a dangerous situation
>because the market now thrists after maximum growth rather than
>respectable growth, thus inevitably chasing after a bubble that it itself
>creates that will collapse with much damage.

Yep. Exactly. Which is why the ECB does not have to intervene.  The US
will implode on its own - it's just a matter of time and having the patience
to wait it out.

>But the euro has declined more against the yen than the dollar.  It also
>declined against the pound and the Swiss franc.  Thus a case can be made
>that political leadership problems are behind the euro's woe.

Dubious.  I myself admit to having bought Swiss Francs and British Pounds
as a hedge when the Euro was launched. Just following the herd.  FWIW,
I just dumped the Pounds last week for Danish Kroner. The Swiss Francs
I'll hang onto until the US bubble pops as it tends to be highly inversely
correlated with corrections in the US markets and I'm guessing American
investors will initially flee to it rather than the Euro when the time comes.
Note that April of 2000 is an exception, which by the way makes mush of
the 'political instability' argument for the Euro.  If the Swiss Franc had risen
substantially against the dollar as the NASDAQ fell, then the political
instability argument might have been plausible.  The odds seem better
that the switch to the now Sec. Summers has entailed some blanket
policy changes behind the scenes towards all European currencies.

>The ECB is
>excessively focused on fighting inflation and excessively aloof of
>so-called "day-to-day" currency market fluctuations, and excessively
>relying on interest rates as the tool of choice for managing monetary
>policy and the economy.

There is indeed some merit in this criticism.  And more flexibility will
certainly have to be added at some point in time in the future.  The EU
institutions are evolving institutions, and are following a pragmatic
rather than ideological set of guidelines. However, I think that it is
noteworthy that the proponents of this criticism by and large are the
same folks who arrogantly intend to propagate dollar hegemony
around the globe. Such tends to discredit the criticism as having any
basis in facts relevant to the present situation.

>While it is true that short term inervention
>against market trends often proves ineffective, but its practical role as
>circuit breaker of irrational market exuberance is doctrinarily
>underplayed.

That begs the question of whether it is appropriate for the ECB
to be footing the bill for cleaning up the excesses in the US.

>The currency market, like all markets, is driven by herd
>instinct, especially in an environment where every money manager needs to
>beat his colleages' performance.

I certainly agree that the herd instinct is in charge at the moment. An image
of lemmings 'skydiving' comes to mind.  These folks are big boys playing
dangerous, speculative games - it's not up to the ECB to bail them out.

>The ECB's responsibility of directing
>longterm market trends by keeping selective gates open and others closed
>through intervention has not be fully recognized or exercised. To be fair,
>the ECB is constrained by law to maintain price stability, forcing it to
>resort to devious inflation theories before it can legally support the
>euro.

Again, I agree that there is a need for the ECB to have a little more flexibility
in the future. However, again, I don't think such is appropriate at the moment.
The constraints are there precisely to stop the ECB from making panic moves
at the present time.  Which, of course, reflects the focus on the reserve currency
issue and the prioritisation such is receiving.

>To prolong the "silly putty" US bubble, Greenspan may tighten US monetary
>policy to push Euroland into recession, just as he kept Asia from recovery
>in the past 3 years.  The net effect may accelerate the bubble's collapse
>and make the aftermath more painful.

Yep.  The total folly of the US's all-or-nothing strategy on the reserve currency
issue will come home to roost in spades.

>
>The euro is a symbol of Europe's future and an important factor in a
>multipolar world order. Should the euro fail, US financial hegemony that
>Greenspan acclaims will take hold.  This will translate to more political
>resistance that is already agitating all over the globe.

All-or-nothing might work as a strategy for nuclear brinksmanship, however
the game is not the same here, where it's more like holding a gun to your
own head and threatening to pull the trigger.  Works great as a motivator to
get your own way until the opposite party ceases to be amused by the scope
of the demands being made and says "Go ahead and pull it."

Hugh