Those evil speculators are back at it again this evening as the Euro once again gets battered and bruised and descends towards a new low. Yesterday’s “shock and awe” resulted in a brief rally in the Euro before it began tumbling once again. The currency is trading off 0.68% as I type (2:15 AM EST).
The Euro is likely to face its stiffest test to date as the coming weeks and months unfold. We’ll find out just how much the bailout package can do to protect what I believe is a mortally wounded currency. As I mentioned yesterday, this is not a solvency crisis, but a currency crisis. This is of vital importance in my opinion. The issue of solvency is unique to Europe. After all, there is no solvency risk in the USA, UK or Japan though many would like you to believe such fear mongering. This solvency crisis in Europe just so happens to be showing the Euro for what it really is – a hopelessly flawed currency system that is destined for failure.
The Euro is simply unworkable in its current format. The problems are deeper than what George Soros described as a “patently flawed” combination of monetary and fiscal policy. In addition to the very serious political flaws there are enormous trade flaws. The trade surplus of Germany is directly inherited as deficit by the surrounding nations. While Germany views this as a sign of strength it is in fact imposing severe strains on the deficit nations. We have seen this time and time again with single currency systems and trade deficit nations. It never ends well. Without serious changes these flaws will persist. I believe the only workable long-term solution is the return of true monetary sovereignty in each of the European nations.
The politicians of Europe clearly don’t understand this as they bailout bankers while imposing harsh austerity measures on their own citizens. Yesterday’s bailout package was the hardest kick of any can ever kicked down any road. For the sake of Europe’s politicians they better hope we are not in a sprint to catch up with this can. If yesterday’s “all in” bet is called as a bluff by global speculators it will have tremendously damaging near-term effects. They have once again gambled with people’s lives due to their own ignorance of the world’s monetary systems.
These men and women have foolishly thrown down the gauntlet against the “evil speculators” of the world. As regular readers know, I think the Euro was flawed from its inception and its vast inefficiencies and resulting imbalances have been exposed. These imbalances have helped contribute to the plight in Europe and now Europeans have literally killed one another over the continually detrimental decisions of their governments.
In the coming weeks, months and perhaps years we will find out just how well natural selection works in the markets. Politicians have continually attempted to kick the can down the road, save dying companies and prolong the inevitable. Clearly, the population is growing tired of seeing good money thrown at bad.
If I am correct, there is no amount of money the Europeans can throw at the problems they confront. The only true answer is reform. As the markets recognize this they will gnaw at the Euro like a wounded animal. Eventually, the politicians will wake up to the fact that the Euro will never be a world reserve currency and that its very existence is contributing to the economic woes in Europe.
In the end, we should all hope that the “evil speculators” weigh on the Euro and attack it with a vengeance for it is not until a restructuring of the EMU that we can be certain that Europeans will never kill each other due to the lack of monetary independence that their countries have. While this is potentially very bearish in the near-term I think it will do a great deal in laying the foundation for the next great sustainable bull market.