Euro in deliberate devaluation

Over last five months, euro has fallen 17% against the US dollar. It is clear that euro is in devaluation mode. Now, I think it is a covert policy decision by the European Central Bank (ECB) to use currency devaluation as a tool for the European monetary union to survive.

Of course, if that is the direction, then, it puts countries like Portugal, Spain, Italy, Greece and Ireland at a competitive disadvantage when trying to salvage themselves from debt burdens and feeble economic activity. It is also highly likely that the ECB to aggressively and openly buy up the government debt of the weak economies to keep them breathing.

Germany is the biggest and most robust country in the euro zone and for this plan to succeed, it has to be drag Germany headlong into it. Of course, they have already done so by agreeing to provide bailout funds to Greece. Germany has a lot to lose if other euro countries end up in shambles. Firstly, Germany is on the hook for $668 billion in PIIGS sovereign debt, and not to mention the fresh $30 billion they have agreed to give Greece. Secondly, if these countries continue their downward spiral, Germany’s intra-Europe exports of about 10% of total exports promise to dwindle with it.

Europe, the IMF and the ECB are demonstrating this week that it is ready to go all out to keep monetary union intact. They announced a massive multi-year bailout for Greece and perhaps to the extent of accepting Greece junk bonds for collateral, which may jeopardize the credibility and independence of the central bank.

In latest ECB press conference, its president Jean-Claude Trichet adamantly said that a Greek default is ‘out of question’ and a biggie…he ignored all questions about the value of euro, despite its slippery slide.