German Elections and the Euro

There are a lot of good posts being written over at a Fistful of Euros on the German elections (here, here, here and here). The outlook is very uncertain. Personally my money would be on the grand coalition idea (CDU/SPD) with Merkel winning the election *without* the necessary absolute majority.

This is starting to lead to 'euro speculation':

The euro fell against the dollar in Asia for a third day this week on concern economic growth in Europe will be worse than that of the U.S.

The European currency also fell after polls showed German opposition leader Angela Merkel may be forced to share power with Chancellor Gerhard Schroeder's party. Merkel is promising cuts in welfare spending and a loosening of labor laws in Germany that if implemented would likely help economic expansion in the country.


I'm very sceptical about the importance of this phenomenon in relation to the German elections. I think the *euro* is overvalued relative to the USD given the relative strengths of the eurozone and US economies, I don't think Germany (any more than Japan) will have a 'miracle recovery' (although companies from both countries will give their US rivals a real run for their money in third country export markets).

At the end of the day, my feeling is that the financial markets are 'in over their heads' on both the outlook for the German and the Japanese economy, although the extent to which this excessive exposure is 'spin driven' or simply a structural product of inbuilt hedging I couldn't say.

And btw, it's all very quiet about Italy at the moment, but that only means that it's off the radar, not that the economic problems have magically gone away. Just keep watching.

And finally, finally, look at how differently Bloomberg spins the earlier referred to BoJ story.There is one nice quote from Iwata though:

``The economy is returning to a phase of a moderate but lasting and self-sustaining recovery.''
This is the point. This is what isn't happening, not in this, or in any other conceivable possible world. It's the self-sustaining bit that is now just impossible.