This post is a quick update to our ongoing commentary on the Greek fiscal crisis and its implications for the euro.  It appears that the European Central Bank is taking a hard line:

The European Central Bank has given its clearest warning to date that there will be no EU bail-out for Greece if it fails to control its spiralling deficit, raising the stakes in a game of brinkmanship over the future of the euro.
Jurgen Stark, the ECB’s chief economist and the powerful German member on the bank’s inner council, said Greece’s problems are entirely “home-made” and do not meet the terms required to trigger the rescue mechanism under EU treaty law, which is limited to countries that face severe difficulties “beyond their own control”.

“The Treaties set out a ‘no bail-out’ clause, and the rules will be respected. This is crucial for guaranteeing the future of a monetary union among sovereign states with national budgets. Markets are deluding themselves if they think that the other member states will at a certain point dip their hands into their wallets to save Greece,” Stark told the Italian daily Il Sole .

Source: Euro brinkmanship escalates as ECB shuts door on Greek bail-out

It will be interesting to watch this war of words escalate.  When it comes to the boiling point, we suspect that the European Central Bank will back down and come to Greece’s rescue.  But whether it does or doesn’t, we see the uncertainly surrounding the crisis weighing heavily on the euro in 2010.

Related posts: “Follow-up to “Who’s Next” — A Greek Tragedy“, “The Destruction of the Dollar? Not So Fast…“, “Follow-up to “Who’s Next” — Spain at Risk of Downgrade“, “Follow-up to ‘Who’s Next’“, “Who’s Next”

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

“The dollar traded near a three-month high against the euro on signs the global economic recovery is gaining traction,” we read on Bloomberg this morning.  Excuse us?  Let’s make sure we understand  this correctly; the world economy is improving, and so the dollar rose?

See, that’s odd because for the past nine months, the headlines have read some variation of “Dollar falls as risk appetites return and global economy recovers.”

So…an improving economy causes the dollar to fall until it causes it to rise.  That makes sense.

Nassim Nicholas Taleb, author of Fooled by Randomness, would have a field day with this.   (We’ve always considered Fooled to be quite a bit better than his more recent The Black Swan.)  Taleb dedicated quite a bit of the book to poking fun at the financial press, specifically their tendency to confuse correlation with causation.  In this case, the dollar is going up and the world economy is improving, therefore the dollar is going up because the world economy is improving.  This is not to say that financial journalists are stupid; far from it.  But the economics of the industry pressure them to “put the pieces together.”  Humans shy away from complexity.  They like absolute answers, not ambiguities.  And frankly, no one would buy a newspaper that read “the dollar rose (or fell) today, but it is most likely statistical noise with no significant meaning.”

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We are asked quite regularly what we see in store for the dollar.   This is a difficult question because nearly every commentator on the matter has an answer that is, for lack of better words, ideologically motivated.  For whatever reason, people want to love or hate the dollar.  For some, the dollar is a source of national pride…for others an example of everything wrong with what the government has become.  

Our view of the dollar can be explained by tweaking Winston Churchill’s defense of democracy: “Democracy is the worst form of government except for all those others that have been tried.”  

To adapt Mr. Churchill’s words, the dollar appears to be the worst currency in the world…except for all those others. 

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