Is the Single Currency Straight Jacket Tightening?

Quotable

"The European Union will suffer something worse than a lost decade; it will endure a chronic divergence."
                                             George Soros

Commentary & Analysis
Is the Single Currency Straight Jacket Tightening?

Well, one day doesn’t usually qualify as a trend, but given the way Mr. Greenie has been hammered and all the nasty things others are saying about him, some deserved, some not, I am going to qualify a one-day move up as a rally.

Is anything shaping out there to suggest this could be more than a one day move?

US$ Index Daily:

Besides my wave count posted on the chart, one idea…well, actually the same idea I have stuck in my head, is for the euro to fall. That would do it given that effectively the dollar index is the EURUSD mirror image.

Today, the spotlight on the eurozone may account for the dollar bid. But tomorrow and Friday the European Union seers huddle again to pull more rabbits out of the hat. Key questions: How many more rabbits are left in that hat? More than we expected so far, that is for sure.

Eurozone spotlight
Two-tiered eurozone shaping up (discussed by Mr. Soros in Tuesday’s FT)
Germany wants and is getting it all (No Basel for their banks)
Efficient northern tier countries pulling away from the pack
Banking crisis brewing (stress test on the way, no worry)
Portugal default pending
Irish wildcard in play
Greeks back in the streets
……………..

But no worry, as all the risk seems to be nullified because the European Central Bank is ―hawkish‖ on interest rates. Euro bulls, ―it’s all good‖ is the theme. Themes that are self-fed by price can last much longer than I or anyone else would expect. Way too early to count out the current theme, but the background seems ripe.

As I discussed yesterday during a webinar I did, sponsored by the International Securities Exchange (ISE), under the guise of their excellent Director of Education, Steve Meizinger, the three charts below tell almost all of the story as it relates to why German industrialists wanted the euro in the first place and why it will likely be about forever before the periphery countries can ever really compete with Germany or create enough wealth to pay existing debt burdens build up when they used to be able to borrow at rates very close to good old Germany:

  1. Chart upper left: German labor efficiency pulling away from the pack
  2. Chart upper right: German surplus equal to all other deficits added together; show me the money!
  3. Chart bottom middle: German growth pulling away from the periphery countries; but a little talked about fact, the disastrous US economy growing faster than any…hmmm…

Short of a very nasty lost decade of growth and political pain of deflationary policies, what is one important way in a free floating currency world that helps a country adjust to a lack of cross-border competitiveness? If you answered: By devaluing its currency, you are right. But of course, the periphery countries cannot do that as they are bundled tightly inside that beautiful committee designed construct called the euro—I call it the single currency straightjacket! Nice ring to it, I think.