Trouble in EuroLand

Drudge headlines screaming about the "collapse of the dollar" aside, the real question is whether the Euro can continue to hold together under the pressure of such strength against the dollar.

It was always questionable whether Italy and Spain could survive under a currency managed by Germans. For years, Italy devalued the Lira whenever the Chinese dropped prices to steal away another Italian industry. That option has now been taken away.

And think the "sub-prime mortgage collapse" is a uniquely American phenomenon? Not so. Spain and other Mediterranean countries have similar problems. The question may not be whether the Dollar is too weak. The question may be whether the Euro is too strong.

A dangerous "inflection point"is at hand for the Euro. European interest rates continue to run well north of American rates. European industry is becoming less and less competitive. Middle East and Chinese investors continue to push up European currency prices, as they switch away from dollar denominated investments.

Soon European politicians may react by instituting currency controls. The result will be European economies in free fall. It is then likely that Populist politicians will be back on the scene.

Sound familiar? The last time this happened, Churchill ended up dialing Washington for help.

I'm not saying that we are headed for another European instigated world war. Ben Berneke is surely an expert on the failings of the global economic system during the 1930's.

But it seems safer to focus on events in Europe when considering the state of the Dollar. It is they who have the structural economic problems. It is they who, if given a do over, wouldn't roll out the Euro across southern Europe. And it is they who sell a large proportion of their goods in the United States, and depend on a stable exchange rate for their competitiveness (think Airbus).

All the lefty bantering aside about the Chinese not "funding our economy", our biggest problem is that a bottle of table wine in Paris now goes for more than ten bucks.

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