This is another fascinating example of reality avoidance. People correctly identify a problem, but the solution is rejected because it doesn’t fit the ideological goals.
This is about the currency manipulations going on world wide. As pointed out in the past, the Euro zone doesn’t have the same vehicles available as the rest, such as Japan and the US. This makes them slower to respond. Townhall has carried an “analysis”report from Reuters.
LONDON (Reuters) – If the euro zone loses the global ‘currency war’, the price will be paid in growth and jobs and fresh tensions about the future of the bloc.
Whoever wins the ‘war’ eventually, few doubt the euro area has been routed in the latest monetary battles between countries printing and depressing home currencies in part to retain trade advantage in a growth-sapped world.
Japan’s plan to aggressively weaken the yen has been the most recent salvo. But that merely counters open-ended bond buying and dollar creation by the U.S. Federal Reserve, pound printing in Britain or even Swiss intervention to cap the franc.
It leaves the European Central Bank as the only operator of the “Big Four” reserve currencies still unable or unwilling to create new cash and put a lid on its exchange rate over time.
They didn’t mention China, but China has pegged their currency to the US. So, they’ve been engaged in the same thing.
The euro has now soared 20 percent against Japan’s yen in just three months, 8 percent on sterling and 7 percent on the dollar – the latter compounding gains against a host of dollar-pegged, emerging currencies. ….
An irony of course is the euro’s rebound is partly due to the healing of the bloc’s crisis since July and the return of investors to peripheral bond and equity markets.
But for all that relief, an expected contraction of the bloc’s economy for the second year running in 2013 means it’s also the area least able to absorb a currency hit right now.
Morgan Stanley’s ‘ready reckoner’ shows a permanent 10 percent euro index rise could shave 0.5 percentage points off growth over the next year and sink its forecast for a 0.5 percent drop in growth in 2013 to a loss of almost 1.0 percent.
Next we see they actually identify two separate difficulties…..
In the meantime, the threat of extreme appreciation returns us to the one-size-fits-all conundrum at the heart of the euro blowout over the past three years.
For example, Morgan Stanley’s estimate of euro/dollar ‘fair value’ – gleaned from relative inflation, growth, exports and labour costs – is $1.33 and only just below current levels.
But that masks huge gaps between ‘fair value’ assumptions for each euro member – stretching from $1.53 for Germany to $1.26 for Spain, $1.19 for Italy and as low as $1.07 for Greece.
And it highlights the daunting task facing the weakest euro members absorbing an exchange rate squeeze after years of back-breaking wage and fiscal adjustments to recoup competitiveness.
Lastly, we have a quote which is almost correct, and yours truly will correct it……
For some on the front line, it makes no sense to lose this war without a fight.
“The currency war is already going on and Europe is left watching ships pass by, doing nothing” said Filipe Garcia, head of Informacao de Mercados Financeiros economic consultants in Porto. “I am not an interventionist but when others are doing it it’s not a
free[fair] market anymore.”
None of it is technically free markets, none of it ever was. And now it isn’t even remotely a fair market. But, look at what these people are hinting at. They want the Euro zone to start printing money like the rest of the world. That’s a solution? A printing race? They know it’s a bad policy, they know it’s a wrong policy but, they want to do it anyway. Why? Because this is all they know. Indeed, it is the entire reason for the Euro zone, which is to compete as a bloc on a global scale. It’s a flawed premise from which they operate.
But, what else can be done about this?
If I were Europe, I’d follow Dirk’s [frequent commenter] lead. The Euro has a huge advantage at the moment, but, the Zone isn’t using what they’ve been given. What they need to do, instead of diving into the horrible whirlpool of printing money the rest of the world is in, they need to play to their strength, which is a strong currency. They need to make it stronger. Everything else around the world is cheaper. Buy the raw materials on the cheap, and produce with that. Buy capital assets on the cheap and work with them. Instead of pursuing free trade agreements, as they currently are with the US, I would make more obstacles to imports. I know this isn’t a popular position with globalists and free market advocates, but, it isn’t what most people would consider a free (read “fair“) market, anyway. In competition, and that’s exactly what this is, one must play to their strengths and not invent new weaknesses for the sake of ideology.
Will the Euro zone do what’s right for their people? Of course, not. They are constrained by their own views on how things should work as opposed to acknowledging how things are working and addressing the challenges of reality.