Is the Euro Doomed? (2)

Source: The Daily Reckoning

06/11/09 Baltimore, Maryland 

Despite all the U.S.’ woes, the dollar is holding pretty steady. The dollar index is just a hair lower than yesterday, now at 79.8. Thus, the dollar’s major competitors are just a few cents off recent 2009 highs… euro: $1.40, pound: $1.64, yen: 97.

Interestingly, the pound is currently at a 2009 high versus the euro, at 85 pence. Trader fears are mysteriously shifting out of the U.K. and into Europe, where the “one currency fits all” model is again in question.

“It only makes sense,” writes our currency trader Bill Jenkins, “that given the present situation, a country like Ireland should not be able to borrow at the same rate as a country like Germany. Yet that has been the very working policy of the ECB. One size fits all. Everybody borrows at the same rate, so theoretically, as they put that money to work, they all profit at the same rate. It supposedly provides some synchronicity to the economies. The only problem is, it doesn’t.

“Germany is putting the squeeze on other members. The more trouble the PIGS (Portugal, Ireland, Greece and Spain) are in financially, the worse they feel the squeeze of Germany’s unrelenting and strong fiscal discipline. And it provides yet another reason for Germany to exit the Union. Simply staying on just to feed the PIGS isn’t going to do it.

“At the same time, the incentive for the PIGS to join the Union in the first place was to piggyback on the strength of the Germans — it offered them lower rates at which to borrow. Now they are seeing rising rates, as they are forced to borrow outside the ECB. Rising rates with a stable currency they cannot control forces them to lower wages on their citizens as the only outlet for financial pressures. No politician wants falling wages on his term record!

“In short, I don’t think the euro has any lasting strength in the years ahead.”