REALITY STRIKES

In the form of George Soros who, as always, is probably talking his book but there is a growing realization that the Euro is causing real pain to the membership list that may not be sustainable.

That should cause no shock to the reader of these effort not to the readers of all sorts of publications over the past twenty years. A currency for a swarm of nations but no universal fiscal policies not to mention common economic planning?  An accident waiting to happen and at this moment that seems to be just around the next bend in the road.  But why now, why not a good while before?

The answer I think is a fairly simple one.  Despite protests (not very loud ones) to the contrary the export first policies of Germany must be considered the prime factor but in past years the takers of German products were the burgeoning economies of the United States and China; that is no longer so.    The economic collapse of the last decade coupled with the strength of the Euro, combined with the inability or unwillingness of Germany to change its economic model have, as we have discussed, forced the products of Germany's highly efficient labor into the less efficient southern tier, reducing output and placing the region on the brink of the dreadful "D" word, deflation.  That is not to say that the rest of Europe bears no blame in this emerging saga for surely the fiscal and economic structure of the region contributed heavily to the economic stagnation that we see today as well as the politics which, in a country like Italy is bizzare to say the least.  Yet, in the past Euroland survived  despite it being a confederation of essentially independent states who, to repeat myself, don't like each other very much and haven't for 1000 years.

Anyway, Soros' suggested solution is a two-tier Euro, one for Germany and her buddies up north and one for the likes of the southern tier.  The chance of anything like that surviving is slim to none but for however long it lasts it gives Soros and his like a trading/arb opportunity such as has never before been seen.  You have to hand it to him: he does nothing, suggests nothing or even dreams nothing that will not first benefit George Soros.  Unfortunately, there is a very good chance that a lot of time will be wasted playing with this proposal which may or may not be meaningful because I see no real solution unless growth can be returned overnight  which failing to occur, pushes Euroland into another round of bail-outs next year.  It would be also well to remember that the outlook in Germany is hardly one of a world-beating economy.  Less than 1% growth at the expense of the rest of Europe is weak and unsustainable from a political aspect.  This is going to be a very tough go for the foreseeable future reinforcing my belief that if anything we are going to see a concerted effort to maintain low interest rates and an expanding liquidity position, certainly in Europe and the U.S.  Unfortunately, it's the only ammunition the Fed and the ECB have left.  Praise the Lord and pass it around