Notes From Underground

While we were at play the world did not stop, but so it goes.

From the standpoint of Europe we will always have Greece, but as we read the news the real story developing is the strains that exist between France and Germany. This does not surprise us at Notes for we always believed that the real struggle was going to be the battle over who controlled monetary policy in Europe. We see the Gaullist principle of Germany as the horse and France as the jockey is coming to an end. The realities of the PIIGS are subverting French dreams of a unified Europe, which would be a counterweight to the Anglo-Saxon model of capitalism.

The Germans will not favor a European Monetary Fund (EMF), as they are afraid of the German Constitutional Court (GCC) rendering such an action as being against the laws of Germany entering the EU. If no EMF, then it will be the IMF that brings some debt relief plan, but that outcome is fraught with problems for the French. IMF support for Greece would undermine the great desires of the French for  European political unity. It will also cause a problem for Sarkozy, as it will put the spotlight on Domique Strauss Kahn at a time when the right in France has just been decimated in local elections. French presidential elections will be held in 2012 and Sarkozy will be wary of bringing his potential opponent, DSK, to the forefront. The Greek debt crisis is uncovering many problems that that Eurocrats have buried in Brussels. The Germans are also coming under attack, as their lack of domestic demand and frugal ways have aggravated the dramatic imbalances within the EU. It seems that the European elites are naming Germany as a currency manipulator–hmm, where have we heard that before?

Even with all the turmoil in Europe, the DOLLAR has not rallied to the extent that many have predicted. The SWISS FRANC and other currencies have recieved some haven status as investors are searching for stable currencies with sound fundamentals, instead of falling into previous patterns. Typically, the DOLLAR OUGHT to be much stronger as the threat of economic instability threatens EUROPE. The U.S. equity market seems to have captured some attention but we find it more than of passing interest that the DOLLAR has not rallied to new highs. We are more than comfortable with the fact that cheap money continues to fuel equity demand but we are cautious about the resumption of protrectionist rhetoric making its way into the global debate. Nothing will put a crimp into the global equity rally than an unleashing of protectionist measures. Remember that any action that inhibits the flow of goods or capital can easily break the fragile global financial system.

In tomorrow’s Financial Times there are two articles putting the onus on Germany to change its economic model. One is by Martin Wolf and the other by Ralph Atkins. We advise our readers to read them both as they are casting a different light on the current turmoil in the EU. Germany will be tested but as we watch Merkel, we are certain that the good burghers of Bavaria will not be pushed into adopting profligacy as the solution to the European imbalances. Sarkozy is trying to mount a rear guard action by pointing the finger at Germany but this is not the Europe of the 1950s. To paraphrase Jimmy Breslin in his comment about Rudy Guiliani, Sarkozy is a little man in search of a balcony.

Tags: Dollar, EMF, IMF, PIIGS, Swiss Franc

This entry was posted on March 23, 2010 at 9:21 pm and is filed under Currency. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.