ECB - Greece No California

By: Axel Merk | Thu, Jan 14, 2010
Print Email

At its monthly press conference, European Central Bank (ECB) President Trichet was assertive in calling for fiscal discipline in its 16 member states that comprise 330 million people using the euro. Asked about bailing out Greece or other member states with severe fiscal challenges, Trichet called the ECB collateral framework crystal clear, applying erga omnes (equally) to every member state; no special treatment will be provided to any one member. In the euro zone, member states may receive funding from the ECB by posting collateral, but only if their debt is appropriately rated by the major credit rating agencies.

Comparing the euro zone to the United States in size and diversity, Trichet said that there are always more competitive and less competitive regions. Being part of the euro provides benefits, such as easy funding of current account deficits, as well as a credible currency. Beyond that, it is the responsibility of member countries to do their job to conduct structural reform. It is in the interest of member countries to help themselves.

Asked about any threat to the euro because of Greece's problems, Trichet pointed out that Greece's Gross Domestic Product (GDP) is a mere 2.5% - 3% of the euro zone GDP. In California, which has its own set of severe fiscal challenges, the magnitude of the problem is far larger (California's GDP is over 12% of U.S. GDP). He went on to stress that euro zone budget deficits currently amount to about 6.5% - 7% in the aggregate, compared to 12% in the U.S.

Asked about the strong euro, he reiterated the importance that the U.S. be committed to a strong dollar and a monetary policy inspiring confidence. Given the statistics highlighted by Trichet, it is fair to assume that he would like to see more fiscal and monetary restraint in the U.S. While it would not be appropriate for Trichet to directly comment on fiscal or monetary policy in the U.S., he was more assertive than ever in calling for fiscal discipline within the euro zone. He reminded member countries that achieving deficit targets is not merely a goal or request, but a requirement. He cautioned that tax cuts should be considered only in the medium term once an exit strategy for fiscal emergency spending programs is in place.

While giving very little guidance on interest rates and upcoming monetary policy, a noteworthy comment of his was that an increase in indirect taxation in countries' efforts to achieve fiscal consolidation may pose a threat to economic growth.

Trichet said that the ECB, along with other central banks and governments have taken bold decisions to avoid a depression; the situation had been very, very grave and there are still a lot of problems. Commenting on financial reform, Trichet said the Asian crisis showed it is very important that banking supervision should be independent of government.

While many are concerned about the rising spreads in sovereign debt in countries such as Greece, we welcome the increased scrutiny the market gives. If anything, spreads that had been too narrow for too long have allowed euro member countries to postpone structural reform. The market is finally correcting this key flaw in the design of the euro. California in the U.S., too, shares a single currency with millions of others; but California is rightfully paying a higher price to finance its spending than other, more fiscally responsible states. In the euro zone, fiscally responsible countries are finally rewarded through a lower cost of financing their debt than their less prudent peers. There is a limit to how much the ECB can police fiscal spending; but the ECB can allow the market to punish those who are fiscally less responsible. Only then are the incentives provided for structural reform and fiscal restraint.



Axel Merk

Author: Axel Merk

Axel Merk
President and CIO of Merk Investments, Manager of the Merk Funds,

Axel Merk

Axel Merk wrote the book on Sustainable Wealth; peek inside or order your copy today.

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies.

The Merk Absolute Return Currency Fund seeks to generate positive absolute returns by investing in currencies. The Fund is a pure-play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional asset classes.

The Merk Asian Currency Fund seeks to profit from a rise in Asian currencies versus the U.S. dollar. The Fund typically invests in a basket of Asian currencies that may include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Hard Currency Fund seeks to profit from a rise in hard currencies versus the U.S. dollar. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Funds may be appropriate for you if you are pursuing a long-term goal with a currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds' website at or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invest in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds own and the price of the Funds' shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Funds are subject to interest rate risk which is the risk that debt securities in the Funds' portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities which can be volatile and involve various types and degrees of risk. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds' prospectuses.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Merk Investments LLC makes no representation regarding the advisability of investing in the products herein. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice and is not intended as an endorsement of any specific investment. The information contained herein is general in nature and is provided solely for educational and informational purposes. The information provided does not constitute legal, financial or tax advice. You should obtain advice specific to your circumstances from your own legal, financial and tax advisors. As with any investment, past performance is no guarantee of future performance.

All Images, XHTML Renderings, and Source Code Copyright ©