Our friends in Europe may think the United States has achieved an economic recovery superior to theirs due to the steroids of low interest rates the Fed has injected into the dollar, but these are times that require us to pump-up like Sylvester Stallone playing Rocky at 60. Germany seems to think the way to battle the Euro zone’s speculation-driven recession monster is for their partner countries to starve themselves through austerity.
While government spending is far too undisciplined in Europe as well as in the United States, let’s remember that is not what caused this economic collapse. Big money gamblers making stupid, greedy bets on high-risk loans and using excessive leverage caused it. Angela Merkle and her government are holding Europe back through its tight money, high interest rates policies and may be more of a cause than Greece, Spain, Portugal and Italy for the eventual failure of the Euro. Even export dependent Germany could be growing faster than they are and does not benefit from these policies. Politically and economically, austerity and high interest rates are not the answers for the Euro.
In the summer of 2002, the Euro and the dollar traded at parity. Since then, the Euro has been on an escalator in value unjustified by their economies. During the Bush era, many members of the European Union adopted the leverage disease they saw making big bucks on Wall Street while Germany largely did not become infected. Perhaps they feel they should not suffer for their partners’ carelessness, but they are the ones who wanted the Euro in the first place. The U.K. has problems of its own, but was wise enough to stay the hell out of the Euro.
Only Germany can save the Euro. The answer is growth and devaluation. The debtor countries can pay back their debts in cheaper Euros and creditors should welcome the move since the alternative is an Argentine style default.
Sarkozy has been defeated in France. Greece, Italy, Spain and others are about to lurch to the political left as well. Germany will soon stand alone in the union against devaluation. They will have to give in to save the Euro. Interest rates will come down. How can we make money on that prediction?
Currency speculation is the pure play, but that’s big bankroll stuff and things can go wrong in the short term regardless of the long-term eventualities. There are safer ways to participate. I believe the European markets will not fall when lower interest rates are adopted. They will rise, just as low interest rates have forced our investors out of treasuries and into the stock market. So be patient, wait for the Germans to agree to cut rates and then buy some VW, Siemens or Bayer. These are great companies with decent dividends.
Any student of history understands that the Germans remember the nightmare of hyperinflation during the Weimar Republic but if they can get over the Third Reich, they can get over the Weimar Republic. The world needs Germany to make a dramatic move now, as we did. They should agree to move ECB interest rates to near zero to match the Fed policy and equity markets worldwide will benefit. When the cost of Spanish, Italian and Greek goods and services become more competitive, their unemployment problems will abate. Parity again with the dollar is a good thing for the Euro and, more importantly, a good thing for the vast majority of Europeans.