Man Without Qualities

Saturday, June 04, 2005

More Unpredictable Side Effects Precipitated By Some Exogenous Events (Big Winner In Berlin?)

Could a deep swoon of the euro help Gerhard Schroeder by making German goods and services cheaper in the export market? The euro is swooning - and just may melt down completely:

An economic adviser to Jose Manuel Barroso, the President of the Commission, gave warning that the situation was "dangerous" and that some countries would want to leave the currency. For the first time financial markets are speculating that the euro may collapse, by offering variable long-term interest rates on government debt in different eurozone countries. ...

The markets had already been shaken by a newspaper report in Germany that Hans Eichel, the Finance Minister, had attended a meeting to discuss the break-up of the euro. He denied the story.

On Thursday, Jean-Claude Trichet, the President of the European Central Bank, dismissed speculation about the end of the euro, calling it "totally absurd" and "complete nonsense."

Many of the countries which joined the euro have suffered economic stagnation and rising unemployment, with people also blaming the currency for rising inflation. ... Italy has plunged into full blown recession.

The euro is vulnerable to a collapse in public support because none of the 12 countries that joined it allowed their people to approve the decision in a referendum. Many Dutch used the referendum on the constitution to show their disapproval of the euro, while in Germany polls show 56 per cent of people want to return to the mark.

A report called The Demise of the Euro by the Centre for European Policy Studies, a think-tank funded by the European Commission, admitted that the currency was probably responsible for Italy's economic problems, which it predicted would soon afflict the majority of countries in the eurozone.

Confidence in the euro collapsed in the markets after the French and Dutch referendums, because economists believe that it would make it difficult for governments to co-ordinate action to keep the currency stable. The currency had already been hit by the collapse of the Stability Pact which underpinned it. Eurozone governments are now openly flouting their legal borrowing limits.
For all that, a true euro meltdown is unlikely, but could a deep swoon help one desperate politician: Gerhard Schroeder? There have been signs that Schroeder will try to formally "run against the Euro." But it's unlikely that Schroeder can win the election by campaigning against the Euro. Everyone in Germany knows that his government has embraced the Euro in the past. How can he make his change of mind plausible? It's true that Schroeder's rather unpleasant character lends itself to turning on former and appropriate allies - such as the US - for political gain. But running against Bush's war was different: the war was overwhelmingly unpopular in Germany and everyone found Schroeder's opposition to it believable. The present situation is totally different.

Some of the current economic malaise is directly attributable to the rise of the Euro and ECB Unfortunately for Mr. Schroeder, most of the world market, his own national economy and public opinion trends don't work fast enough for him to experience much of a surge before the likely elections in September. Even if the Euroswoon lasts and orders for German exports pick up, it would take many months for the psycholgical effects from those developments to transform a substantial piece of the electorate. So the most likely effect of the EU and Euro trouble will probably to just generally aggrevate the impression that things have not gone well for Germany on Mr. Schroeder's watch. In other words, the big winner in Berlin from the recent Eurotroubles will likely be Angela Merkel.

As noted in a prior post, Warren Buffett and his Berkshire-Hathaway are likely to be among the biggest short-term financial losers from the recent demise of the EU Costitution. Berkshire has over $20 Billion bet against the dollar - much of it in favor of the euro. A continuing deep Euroswoon sure seems to likely to correlate with a deep Buffett swoon.

UPDATE: From the Wall Street Journal:
Some studies by the European Central Bank show that a 5% drop in the value of the euro against the currencies of major trading partners can add -- if sustained over one year -- between 0.5 percentage point and 0.9 percentage point to economic growth. Late Friday in New York, the euro was ... down about 10% against the dollar from the euro's record at the end of last year. .... A depreciation of the euro could result in stronger economic growth than expected in the 12-nation currency bloc. In new forecasts last week, the ECB pegged growth at roughly 1.4% for this year and 2% next year. But that forecast is based on a euro of $1.29 -- nearly seven cents, or 5.5%, higher than its level late Friday. .... It isn't clear how long and to what extent the current political turmoil will continue to weigh on the currency. ... "The question is: What is temporary? What is permanent?" said Otmar Issing, the ECB's chief economist, speaking to reporters in Frankfurt Friday about the euro's recent drop. The comment suggests the ECB isn't ready to revise forecasts based on the recent moves in the exchange rate. ....

Supporting exports is particularly important now for the euro-zone economy because two other pillars are particularly weak: Consumers and businesses have refrained from spending and investing. A negative to a weaker euro, however, is that it can make the price of oil -- denominated in dollars -- even more expensive.

The euro is still trading well above its average of $1.03 during the first six years of its existence. But the slight easing will help German auto makers, particularly Volkswagen AG, which has suffered from sharply falling sales in the U.S.

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