Saturday, June 4, 2011

Euro is still better than US Dollar ---By Shan Saeed

Euro Still Better Than the Dollar, Despite its Problems---by Shan Saeed

What I find funny about bull markets is they really do climb a wall of worry...If you read anything about the euro, all you hear are the negative things: The socialist governments in Europe, how all of the countries can’t get along and the PIIGS (Portugal, Italy, Ireland, Greece, Spain).

There are also a lot of good things about the euro and European union. I can share some interesting facts about EU. The common union and elimination of borders is great for travel and economic trade. In addition, Germany, the driver of Europe, wasn’t really all that affected by the economic crisis and is seeing near-record exports. If I were to analyze Germany and USA, there would be marked difference in the strategic approach to the economy.

Americans borrowed an amount equal to 6 percent of G.D.P. in an attempt to stimulate growth. The Germans spent about 1.5 percent of G.D.P. on their stimulus. This divergence created a natural experiment. Who was right?

The early returns suggest the Germans were. The American stimulus package was supposed to create a “summer of recovery,” according to Obama administration officials. Job growth was supposed to be surging at up to 500,000 a month. Instead, the U.S. economy is scuffling along.

The German economy, on the other hand, is growing at a sizzling (and obviously unsustainable) 9 percent annual rate. Unemployment in Germany has come down to pre-crisis levels.

Results from one quarter do not settle the stimulus/austerity debate. Many other factors are in play. For example, Germany is surging, in part, because America is borrowing. Essentially, the Americans borrowed from everyone, spent some of that money on German machinery, and ended up employing German workers.

But the results do underline one essential truth: Stimulus size is not the key factor in determining how quickly a country emerges from recession. The U.S. tried big, but is emerging slowly. The Germans tried small, and are recovering nicely.

The economy can’t be played like a piano — press a fiscal key here and the right job creation notes come out over there. Instead, economic management is more like parenting. If you instill good values and create a secure climate then, through some mysterious process you will never understand, things will probably end well.

The crucial issue is getting the fundamentals right. The Germans are doing better because during the past decade, they took care of their fundamentals and the Americans didn’t.

The situation can be expressed this way: German policy makers inherited a certain consensus-based economic model. That model has advantages. It fosters gradual innovation (of the sort useful in metallurgy). It also has disadvantages. It sometimes leads to rigidity and high unemployment.

Over the past few years, the Germans have built on their advantages. They effectively support basic research and worker training. They have also taken brave measures to minimize their disadvantages. As an editorial from the superb online think tank e21 reminds us, the Germans have recently reduced labor market regulation, increased wage flexibility and taken strong measures to balance budget

The European Union also doesn’t run a current account deficit, whereas the U.S. deficit is higher than PIIGS percent of GDP. In addition, because Europe has such huge, ridiculous welfare states it is going to be much easier for them to cut spending and get their deficits down.

Finally, Europe doesn’t have to pay for foreign ventures and being the policeman of the world like the United States. Therefore, don’t count out the euro. Despite of all the perceived problems, the euro has still climbed to $1.48 by year end. And I think in the long run it will continue to climb against the U.S. dollar.

Disclaimer: This is just a research piece. Investors are encouraged to execute their own due diligence before entering into any financial contract or obligation. All financial transacations carry a RISK....

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