Euro Zone, a Continent Divided

Support for euro in doubt as Germans reject Latin bloc notes

Ambrose Evans-Pritchard
13/06/2008

Notes printed in Berlin have more currency for bank customers who fear a 'value crisis' Ordinary Germans have begun to reject euro bank notes with serial numbers from Italy, Spain, Greece and Portugal, raising concerns that public support for monetary union may be waning in the eurozone's anchor country.

German bank customers are favouring notes that start with the distinctive ‘X’ serial numbers, which show they have come from Berlin Germany's Handelsblatt newspaper says bankers have detected a curious pattern where customers are withdrawing cash directly from branches, screening the notes to determine the origin of issue. They ask for paper from the southern states to be exchanged for German notes.

Each country prints its own notes according to its economic weight, under strict guidelines from the European Central Bank in Frankfurt. The German notes have an "X"' at the start of the serial numbers, showing that they come from the Bundesdruckerei in Berlin. Italian notes have an "S" from the Instituto Poligrafico in Rome, and Spanish notes have a "V" from the Fabrica Nacional de Moneda in Madrid. The notes are entirely interchangeable and circulate freely through the eurozone and, indeed, beyond.

People clearly suspect that southern notes may lose value in a crisis, or if the eurozone breaks apart. This is what happened in the US in the Jackson era of the 1840s when dollar notes from different regions traded at different values. "The scurrilous idea behind this is that if the eurozone should succumb to growing divergences, then it is best to cling to most stable countries," said the Handelsblatt.

"There are no grounds for panic. The Italian state is not Bear Stearns," it said. Germans appear to be responding to a mix of concerns. Many own property in Spain or Portugal and have become aware of the Iberian housing slump. A spate of news articles in the German press has begun to highlight the economic rift between the North and South of eurozone. There is criticism of comments from Italian, Spanish, and French politicians that threaten the independence of the ECB, viewed as sacrosanct in Germany.

But the key concern appears to be price stability. Germany's wholesale inflation rate reached 8.1pc in May, the highest level in 26 years. The cost of bread, milk and other staples has rocketed, adding to the sense that prices are spiralling out of control. Inflation touches a very sensitive nerve in Germany. Holger Schmeiding, from Bank of America, said the country had suffered two traumatic sets of inflation in living memory, first in Weimar in 1923 and then in 1948.

"People suffered a 90pc haircut on financial assets in the currency reform of 1948. The inflationary effects of two world wars were catastrophic," he said. Many have kept a stash of D-Marks hidden in mattresses to this day. A recent IPOS poll showed that 59pc of Germany now had serious doubts about the euro.

US Dollar Intervention Madness

This recent entry by Mike "Mish" Shedlock highlights the forthcoming madness in currency markets. Mish's blog is among the most informative, well sourced and thoughtful diatribes on capital markets and the madness of central banking.

J
------------------------------------------------------

U.S. Dollar Intervention Madness


Paulson is once again talking the talk about the strong dollar. "We've taken quite a clear position on this in saying that a strong dollar is in our nation's interest".Paulson can talk all he wants and it won't matter one iota until Bernanke starts walking the walk. If Bernanke was concerned about the falling dollar all he has to do is raise interest rates. But everyone knows the next move is lower.

Intervention Watch

The slumping dollar has Morgan Stanley, Goldman On Intervention Watch.
"We're on an intervention watch," Stephen Jen, Morgan Stanley's London-based head of foreign-exchange research, said in a telephone interview. "While I don't think we have reached the threshold yet, the argument in favor of it is gradually becoming compelling.""The dollar's fall will worry other markets, which are so fragile right now," Jim O'Neill, chief economist at Goldman Sachs said in a telephone interview. "Intervention will definitely be on the minds of policy makers."Any action by the G-7 would be the first since its governments united in September 2000 to boost a falling euro. The dollar sank as low as 79.75 yen in 1995 to prompt a rescue then.Since 2002, the G-7 has focused on lobbying China to stop meddling to weaken the yuan while leaving itself with some room to maneuver by noting its aversion to "excess volatility and excessive movements in exchange rates."A Compelling CaseThe idea there is a "compelling case" for currency intervention is complete silliness. However, a very compelling case can be made for
Abolishment of the Fed.

Peter Bofinger, adviser to ECB, says Time For The ECB To Start Buying Dollars.

"The uncontrolled increase of the euro rate vis-a-vis the dollar threatens
employment growth in the euro area," said Peter Bofinger, one of Germany's
so-called "five wise men" appointed to advise the government on
economic matters. He told Forbes.com that the ECB had an obligation to oversee
growth, and that it had to act now--alone if necessary--to stop the euro from
rising further.But although the European Central Bank has so far refused to
budge from its own key rate of 4.0%, citing its primary goal of fighting
inflation, Bofinger argued that the bank still had the power to tame the euro's
rise. He said the ECB could intervene in the foreign exchange markets to buy
more dollars, preferably in conjunction with other central banks like the
Federal Reserve or the Bank of Japan.

Anyone promoting currency intervention as an economic policy is a fool not a wise man.
Furthermore it should be blatantly obvious that Currency Intervention does not work and as long as the US keeps spending money it does not have on things it does not need and cannot afford, the dollar is going to be weak. If Paulson does not know that he should be fired. If he does know that he should have the integrity to come out and say it.If the US wants a stronger dollar all it has to do is eliminate the budget deficit. If it wants lower oil prices all it has to do is eliminate the deficit, get out of Iraq, and stop wasting oil on needless military missions.It's that simple but sadly no one in either party other than Ron Paul is willing to make those kind of statements. Instead the silly talk goes on and on.

Bloomberg is reporting Dollar Falls to Record Versus Euro, Near Decade Low Against Yen.

The Dollar Index traded on ICE Futures in New York, which compares the
currency to those of six trading partners, fell to a record low of 71.731 today.
The decline in the world's reserve currency pushed gold above $1,000 an ounce
for the first time yesterday as investors sought shelter in the metal."With
stocks falling, traders are rushing into yen- buying," said Takeshi Tokita,
vice president of foreign- exchange sales at Mizuho Corporate Bank in Tokyo, a
unit of Japan's second-largest publicly traded lender by assets. "There are
some rumors hedge funds and banks will go into bankruptcy."Carry Trade
UnwindsA rising Yen is synonymous with an unwinding of the carry trade. A rising
Yen and has also consistently tracked the $SPX in inverse fashion for over a
year.

I have called for a stronger Yen and got it. However, I sure did not get an expected rise in the dollar vs. the Euro. One of the reasons is Trichet has been incredibly stubborn in refusing to cut rates while Bernanke has been in an absolute state of panic cutting that is not doing one bit of good.I do not know how much longer Trichet can hold out given that the German banking system like its US counterpart, is in shambles and property bubbles are imploding in various parts of Europe.But heaven help us if central bankers try to address horrid US fiscal and monetary policies with currency intervention.

Currency intervention cannot work, and failed attempts will simply add further stress to the extremely fragile system.It's important to remember: Crashes do not occur in overbought conditions, they occur in oversold conditions. While not specifically calling for a crash here, these are the kinds of situations in which one can easily occur.

Mike "Mish" Shedlock