Yesterday's Daily Telegraph, published in London, contained an article by
Ambrose Evans-Pritchard that should strike financial horror into the hearts of
central bankers around the world.
It was titled, "French mutiny brewing against the euro."
The role of the newly established single euro currency, which replaced the
German mark and the French franc, was clearly to create an heir apparent to the
dollar as the world's reserve currency.
The Euro's Shaky Beginnings
The foreign exchange wealth of many nations is now widely held partly in euros. If it should collapse, it could precipitate a most unwelcome international financial crisis at a most inopportune time.
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We feel it represents a political time bomb, now primed for explosion.
The euro is a "political" currency established in January 1999, by 12 of the
member countries of the European Union. Most notably, Great Britain was
skeptical and did not join. Unlike the Deutsche mark and the French franc, the
pound sterling still exists and trades as a free currency, backed by the
government and the Bank of England.
'Disunity' in the Union
After at least a decade's worth of dedication to moving in the same direction at
the same speed, the EU is still not yet truly unified in terms of its politics
or economics. Today the union has widened to 25 individual countries, each with
its own economy.
For this reason, we'd call the euro a "political" currency and have always been
skeptical of its long-term viability.
In the negotiations leading up to the formation of the euro, the Germans could
be persuaded to abandon their Deutsche mark for the euro only on condition that
the European Central Bank (ECB) was based in Germany. Its single mandate was to
avoid inflation and the political independence to enable it to do so.
[Editor's Note: The government is lying about inflation.
Protect
yourself now.]
This was a major sacrifice for the remaining European countries, most of whom
were accustomed to politically engineered depreciation of their currency to
boost exports and sustain uncompetitive employment.
This factor is of crucial importance and lies behind the thrust of the Ambrose
Evans-Pritchard article.
Basically, the ECB runs things in a no-nonsense "German way." Inflation is not
tolerated and interest rates are set to ensure that inflation does not take
hold. But at what cost?
One Size Does Not Always Fit All
Mr. Evans-Prichard quotes his fellow Brit Derek Scott (Prime Minister Tony
Blair's former economic adviser) as saying; "the euro system was becoming
unworkable as the one-size-fits-all drove countries further apart . . . the ECB
faces an impossible task because there is no such thing as Euroland. They are a
group of countries going different ways . . . Germany has clawed back [its]
competitiveness by squeezing its economy, but Italy, France, Spain, and others
have been enjoying property booms. Booms go bust."
Even within the EU single currency zone, Italy has lost 40% in competitiveness
against Germany, while France has lost 20%.
Despite the dollar benefiting from a 1.75% yield cushion over and above that
available on euro currency deposits, the euro has gained 11% in value against
the dollar so far in 2006.
The northern so-called "Teutonic" countries have, like Germany, squeezed their
economies and became competitive, despite a relatively strong currency.
The southern, or so-called "Club Med," countries have long been used to
politically depreciated currencies and are being hurt badly by the strong euro.
In particular, the French auto, aircraft, and satellite industries have been hit
hard.
Mr. Evans-Pritchard quotes the former French premier, Dominique de Villepan, as
calling this week for the EU states to retake control over their economies and
set power limits on the ECB.
"We must clarify matters in exchange rate policy," said de Villepan, "which
means taking back our sovereignty." He was reported to be alluding to the
Maastricht Treaty as a tool that could enable politicians to set interest rates,
stripping the ECB of its independence.
We find it hard to accept that Germany would agree to this and note that
Philippe de Villiers, leader of the MPF movement is reported as saying, "The
euro is a failure."
Derek Scott said, "In the end, the ECB may have to respond to the needs of the
weakest economies or monetary union will fall apart." We believe he is correct
and that it will lead to old-fashioned chaos.
But many of the world's central banks have recently diversified out of the U.S.
dollar. They now hold vast amounts of euros in reserves.
Talk about out of the frying pan and into the fire!
We wonder what dramatic effect a collapse of the euro would have on the world's
delicately balanced international currency system. It is a most sobering
thought.
We are told that U.S. Treasury Secretary Paulson is leading a top-level
delegation to persuade the Chinese to be more flexible regarding the exchange
rate for the Chinese yuan.
[Editor's Note: Can Ben Bernanke avert the coming currency crisis?
Go here now.]
We ourselves feel this is mere camouflage for the most vitally impotent reason
for the trip, which is to "beg" the Chinese not to dump large amounts of their
$700 billion of U.S. dollar denominated assets.
Yesterday's article by Evans-Pritchard will probably make the Chinese think
twice about the future of the euro. Paulson will welcome that. That is, unless
the Chinese now look to "real," old fashioned money, namely gold, as an
alternative for their national reserves!
We believe that a Chinese move into gold could be catastrophic for the
currencies of the major debtor nations. We think that the Chinese do not want
either to precipitate or even threaten such a collapse. But, like others, they
can make mistakes.
Only time will tell. But, anyway you cut it, the extreme delicacy of the present
international currency world does not bode well for the future.
In the meantime, we must tell our readers that in the January edition of
Financial Intelligence Report we will be warning that 2007 will be the
year of reckoning. The news of the possible break-up of the euro, now a major
reserve currency will add to our sense of foreboding as it could provide a
trigger for the financial "reckoning" we foresee.
[Editor's Note:
Financial
Intelligence Report Stays Ahead of the Trends and Herd With Market-Beating 35%
Gains Since 2003.]
Surprisingly, or not so surprisingly, you will see little or nothing of this
concern in the main media. There, the music still continues to play.
Our conservative investors should therefore remain patient in the face of frothy
markets, sustained largely by political and financial market hype and remain
heavily weighted in cash, short-term, high-quality bonds and gold.
Those in longer-term bonds or stocks should stay very alert and close to the
door.
Editor's Notes:
