As you know all too well, I am a Frenchman living in New York. My family moved to the United States when I was a young child, back in the early 60s. My father had been sent to the U.S. to open an overseas sales office / assembly plant for H.E.S. the largest Machine Tool manufacturer in France.
At the time his company was considered a premium fabricator of CNC computer numerically controlled large industrial lathes & milling machines. These 1 to 20 ton large machines would cut / mill large blocks of steel, aluminum or plastics into working parts for all different industries. They would make everything from axles for automobiles, ball bearings for electric motors, engine blocks & pistons, airplane parts, bowling balls and even the swivel cuff attachments for the astronauts gloves. Basically, all heavy industry use these machines to make the parts that go into most consumer and commercial products. H.E.S. did a thriving business as the U.S. economy powered through the industrial boom times of the 60s and early 70s. Then along came fierce competition from their Japanese counterparts. Soon the markets were flooded with adequate Japanese replicas, which were offered 20-30% below what their machines were sold for. Needless to say, my father was none to pleased about this harsh development. As a young kid, I remember asking him, why the japanese could out price them so aggressively, and he would answer; "they worked very hard for less son, and even more importantly had a great advantage because their currency was so under valued." So you see, I have a long standing understanding and very personal experience of the power of exchange rates, and the effect of currency fluctuations / devaluations on the real economy.
So how does the EURO fit into this quaint french family story? Well, the EURO was primarily brought into existence so as to reduce the negative impact of currency fluctuations on international commerce. It was thought that if the entire European continent had the same monetary system, like the United States, then it would greatly benefit the economy of the entire zone. It would eliminate the detrimental effects of the constant fluctuations of multiple exchange rates which impeded the free flow of commerce, and also added uncertainty and excessive local banking inter-mediation between commercial interest across the the many States. We all now know, that although it may have been a good idea in theory, it was a very bad idea in practice, as a monetary union without an equivalent political union causes more imbalances then it was meant to resolve.
So now what? It seems very clear that the Europeans need to re-think their grand EURO experiment, before it consumes their entire continent. They have two choices, either they quickly create a political / fiscal union to under pin their monetary union with a central bank set up as the lender of last resort, or on the other hand, they agree to dissolve or at least reduce the scope of the Eurozone. In other words, they need to either bailout the weaker less industrious economies with monetary support via central bank monetazition, or let these economies break away so that they can devalue themselves back to equilibrium.
If they choose the path of a federalized ECB with all the monetary authority that comes with it, that will necessarily entail more QE via monetization of the excessive debt within the currency block, as well as lower interest rates to stimulate growth. The other path available to them, would be to break apart the Eurozone which will create a smaller overall economic zone with a less important currency, not to mention the ensuing chaos of such a large scale restructuring of their entire financial system. Either way, it is most assuredly EURO negative, in the short to intermediate term.
The USD will be the direct beneficiary of either path the Europeans choose. The inevitable EURO crack up or crack down will lead the U.S. equity market lower…….
Let the devaluation begin…Evil Plan 21.0 will lead the way
BDI SOH's Idiot Savant