Thursday, June 2, 2011
Wednesday, June 1, 2011
Why the Euro Will Remain Strong
There is much apprehension about the future of the Euro, especially in light of the current debt crisis that is sweeping Europe. The concern is valid. Greece is floundering, Ireland is a mess, Portugal needs assistance and empirical evidence suggests that Spain and Italy are next.
There is much to be said about the sustainability of the Euro, something that I have questioned for several years. With little doubt, the most poignant incongruency of the Euro Zone, is its lack of ability to align fiscal with monetary policy. Even with the ECB's attempt to influence fiscal policy, through its doctrine of imposed austerity on needy nations, its inadequacy of being able to govern spending at the appropriate level is obvious. The riots and demonstrations that show their colors in the streets of Greece, Spain and Portugal are indicative of the ineffectiveness with which local governments have been able to address their respective electorate. Things are bound to become much worse, until ultimately, weaker countries will be compelled to abandon the Euro and revert to their local currencies. (See Paul Krugman's "The Road to Economic Crisis is Paved with Euros")
What does this mean for the Euro? Not much. Should the financially weaker countries of the Euro Zone bail from the Euro, the Euro will effectively come to represent a more stronger set of countries, essentially composed of Germany and France.
Secondly and of equal importance is the fact that interest rates in Europe as governed by the ECB are expected to remain firm. There has been an expressed willingness to "combat" inflation through interest rates, irrespective of the inadequacy of the methodology that is being applied to measure inflation. As I have mentioned previously (see "Fool's Trap: Measuring Inflation"), interest rate determination in Europe is going to have little impact on a drought that may prevail on the wheat belt, causing grain prices to firm; or on instability in the Middle East that would result in a spike of crude, consequently feeding "inflation".
Irrespective of the effectiveness of Europe's interest policy in constraining inflation, firmer interest rates in Europe relative to the U.S. will maintain a strong Euro, if not as a sole consequence of traders taking advantage of the "carry trade".
Another corollary of a firmer Euro is that manufacturers in Europe will struggle to provide goods outside the Euro Zone, at competitive prices. The robust growth that Germany has experienced in recent months is quite deceptive, if you bear in mind that Germany's main trading partners are France, the Netherlands (both part of the Euro Zone) and Iran.
In summary, probabilities are weighted towards a firm Euro, relative to the dollar, especially if weaker Euro Zone countries capitulate.
Also see: Future of Euro's Sustainability is Vulnerable
Tuesday, May 31, 2011
Monday, May 30, 2011
The Lady Who Rocked the Higher Echelons of Finance and Politics
She was the cause of Europe's leap to pandemonium, as party politicians took to panic stations and reshuffled leadership chairs for forthcoming elections. She could also claim responsibility for the Swiss Franc's spike to record highs, as the market's flight-to-safety began to take momentum.
While the U.S. was experiencing a record number of tornadoes that caused ruthless devastation, Europe was experiencing a double-twister of its own. The Greek bailout is on hold and there is a possibility that it may never happen - in the way of extended assistance by the IMF that would prevent Greece from defaulting on its loans. Additionally, financial leaders across the globe are in a panic to identify a new leader for the IMF; someone who has the competence to navigate Europe through one of its most severest storms ever.
The lady in question responsible for these chain of events, is a mere thirty-two years old, beckons from Guinea and is a chamber maid at the Sofitel Hotel in Midtown Manhattan. She is the lady who laid charges against Dominique Strauss-Kahn, leader of the IMF for sexual assault. Because her name has not been officially released, for obvious reasons, let's just call her Madame X.
When she decided to lay her complaint, it is unlikely that she fully appreciated the consequences of her actions. My bet is that someone played a key role in encouraging Madame X to purse her claims, irrespective of their merit. I would be interested to find out the identity of the mystery sponsor. Additionally, Madame X is represented by counsel. Lawyers that are imbued with the quality of representation that she has sought, come attached with a hefty price tag. And given that a typical retainer fee is conservatively, anything from $20,000 upwards, which is not the sort of lolly that a chamber maid keeps under a mattress, I ponder as to who provided the funding. Perhaps Madame X's attorney is representing her on a contingency basis - unusual for a criminal case where there is no financial award, even if there is hope for a civil action. Or given the publicity that the case is likely to receive, her counsel may have agreed to render services pro bona. Possible, but unlikely. I'm not suggesting conspiracy, but I smell a rat.
The IMF do have several candidates suitable for the leadership position, favorite of which is French Finance Minister Christine Lagarde. Although, it will be hard to fill the shoes of DSK, Christine Lagarde is a worthy choice. There are two main characteristics with which a leader of the IMF should be infused. Firstly, the person should have a sound understanding of economics and finance, which includes the political dynamics that currently reign. Secondly, the candidate needs to have a degree of political "charm", to ensure that consensus amongst its members can be achieved and that strategic goals are met. Lagarde has both. She comes across as a tough cookie, the type that would make me think twice about embarking on an elevator ascent in her sole company. However, my instinct tells me that she can turn on the charm, when she wants to. I know she can.
Sunday, May 29, 2011
Saturday, May 28, 2011
Friday, May 27, 2011
Thursday, May 26, 2011
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