Crisis of Confidence in the EU

The European Union (EU) constitution was dealt a double blow, first by a French "no" vote on 29-May and then by a follow on "no" from the Netherlands on 01-Jun. To add insult to injury, one low level Italian diplomat quickly called for a referendum in Italy to decide if a return to the lira was warranted. Additionally, Prime Minister Tony Blair, who took over leadership of the EU on 01-Jul, indefinitely postponed the British referendum on the EU constitution.

This news along with plenty of speculation about the repercussions dominated the international headlines for much of the month of June. Not surprisingly, all the hubbub about the EU had a direct impact on the FX market. The euro fell to a new seven month low following the French referendum, reaching a low of 1.2371 and the "single currency" has been under pressure ever since. Probes below the 1.2000 level were seen ahead of 30-Jun, suggesting additional near term downside potential toward 1.1756 and beyond.

Since the inception of the euro in 1999 central banks, especially those in Asia and the Middle East were seen diversifying out of dollars into the euro. They were not only looking to scale back their substantial dollar holdings in the face of a declining market, but they also sought the higher returns available in the eurozone. However, returns on eurozone deposits slipped below those in the United States in December and the FED's string of rate hikes bodes well for those differentials to further widen. Combine the better returns in the US and a generally more favorable dollar outlook with the specter of continued political turmoil within the EU and it seems there is little incentive to hold euros at this point.

Truth be told, the EU was facing some rather significant hurdles long before the double "noes" derailed confidence. Many of these hurdles are associated with expansion. Discontent on the part of established club members with the admission of central European countries in May-04 and general hostilities about the proposed admittance of Turkey played significant roles in the recent referendums. In addition, diverging economic performance, productivity growth, inflation and fiscal performance among member nations are all fodder for further turmoil.

Worthy of particular note is the broad based economic malaise in Italy. Italian consumer product manufacturers are losing their battle with Asia and consequently the trade balance is moving into the red. Unemployment is up, as is the budget deficit. Being part of the euro, and therefore having a relatively high exchange rate, essentially thwarts any effort to compete with Asia on price. Without its own currency, Italy is unable to devalue out of its non-competitive position. Hence, the aforementioned comments by Italian Minister Maroni. Countries such as Portugal and Greece are also in rather dismal economic health. The budget deficit of the former has already reached 7% of GDP.

Many have noted that the EU constitution may be dead, but it's not buried yet. I'm not so sure that I would agree as approval of all 25 member counties is needed for ratification. The initial thought was that any dissent was likely to come from newer or smaller EU countries and that a little economic arm twisting by the likes of France and the Netherlands might encourage them to reconsider. Unquestionably the long standing skepticism of the Brits was going to be an issue. However, rejection of the constitution by two of the founding members of the EU certainly throws a wrench in the works.

I don't believe that we need to worry about the European Monetary Union (EMU) breaking up any time soon. In other words, the euro will continue to be actively traded on the global spot market. A Reuters poll early in June suggested there is only a 5% chance of an EMU collapse within the next 15 years. However, around the same time the German weekly magazine Stern reported that the failure of the EMU was discussed at a meeting attended by German Finance Minister Hans Eichel and Bundesbank President Axel Weber. Having said that, I don't think there is any question that there is a greater risk premium attached to the euro than there was a month ago.

In the months ahead, look for continued political wrangling within the EU. Further bad news is likely to be forthcoming, which should help keep the euro under pressure, creating trading opportunities not only against the dollar, but in the cross rates as well.

Peter Grant is VP of Operations for CFS Capital Management (http://www.cfscap.com), an alternative investment firm in Lakewood, Colorado. This article is an excerpt from our monthly newsletter 'The Alternative' which can be read online at http://www.cfscap.com/news.htm. Emails may be sent to pgrant@cfscap.com

Escalate firepower to win the acne war SouthCoastToday.com, MA - 7 hours ago Fighting acne involves conducting warfare on many fronts. One front is the overproduction of male hormone that occurs in puberty and at other stages of life ...

Acne: Prestige Beauty's New Bull's-Eye Posted Sep 5, 2008 Women's Wear Daily - 8 hours ago by Molly Prior Prestige beauty firms are raising an issue with raised red bumps — notoriously referred to as acne — and increasingly are adding ...

Best Syndication

Acne - The Aftermath of Acne Breakouts Best Syndication, CA - 20 hours ago If you suffered from acne, you would know that severe acne like cystic lesions could create scarring, redness and pigmentation. If the acne was not treated ...

Steroid abuse acne scars are a real eyesore Irish Medical Times, Ireland - Sep 3, 2008 The BBC reported that while mild doses can cause slight acne, this man used such severe doses the rash over his back and chest ulcerated. ...

Condom Lubricant Used as Acne Cure in Cambodia FOXNews - Aug 29, 2008 A condom lubricant produced by a health organization to protect sex workers and gay men is being hailed as an acne cure by some in Cambodia, ...

Best Syndication

Acne Does Not Choose - Be it a Man or a Woman Best Syndication, CA - Sep 1, 2008 You see television programs about acne, you read articles about acne, and the internet is loaded with information about acne. Despite all these knowledge, ...

Michala Banas Joins Celebrity Cast Supporting Acne Treatment ... Free press releases (press release), UK - Sep 1, 2008 McLeod’s Daughters actress Michala Banas becomes new face of acne management treatment, Proactiv Solution. Popular Australian celebrity Michala Banas has ...

Acnecentre.com Launched With A New Key For Acne Fetters PR Web (press release), WA - Sep 1, 2008 Acnecentre -- A new acne and skin care advice portal now works on the latest medical ideas to help teens and adults from acne hazards. ...

Photo retouching service zaps age lines, acne and more Tribune Review, PA - Sep 1, 2008 For $7 per photo, his staff of five designers would remove acne and age spots, smooth out crows feet and age lines, even out skin tone and reduce shininess. ...

Study Outlines Teens' Preferences And Trade-offs For Freedom From Acne Science Daily (press release) - Aug 20, 2008 20, 2008) — Teens report that they would pay about $275 to have never had acne, and are willing to pay considerably more to be acne-free than to have 50 ...