European Politicians Living in Ivory Towers Confuse Stagflation with Stability

By: Axel_Merk

Just because we have been favoring the euro over the U.S. dollar in recent years doesn't mean we believe everything is perfect in Europe. The rejection of Irish voters of the latest attempt by the European Union (E.U.) to streamline its decision processes highlights a fundamental weakness: the inability of European politicians to communicate with its citizens.

In 2005, Dutch and French voters declared the new European Constitution dead by rejecting referenda. In the days leading up to the vote in France, their president at the time, Jacques Chirac, appeared on TV and told his citizens that it is their duty to approve the treaty and great harm will be done if anyone dared to vote no. This sort of bullying tactic has been the modus operandi in France for years; this time around, it didn't work.

With constitutional reform dead, European politicians devised an alternative to find a way to govern their 27 member states: the Lisbon Treaty , a reform package that achieves many of the same goals, such as negating the need for unanimous votes on many issues. Key aspect of this treaty was that it did not require a referendum to be held in most member states. The idea is straightforward: if the public cannot be convinced, do not ask the public.

Now in Ireland, the one state in the European Union many may argue has benefited the most from membership in the E.U. has rejected the new treaty by referendum; it's the only state that requires a referendum; parliament decides in the other states.

Ireland's rejection shows that European politicians simply have not learned their lesson. A representative democracy can only represent their citizen if they communicate with them. Politicians must learn to both listen (first) and speak (second). There is a valid criticism that some U.S. politics may be based too much on polls, but that does not justify retreating to an ivory tower to conduct European business. The White House in Washington may be one of the world's best-known brands; it's a symptom that the U.S. is pretty effective in communicating with the public. Few know whether European politicians indeed work in an ivory tower or possibly in a sandstone tower (historic buildings in Brussels are made out of sandstone). It turns out that the European parliament meets in both Strasbourg and Brussels; both buildings suggest that they may be working from a glass cage (link to Strasbourg and Brussels buildings).

The lack of knowledge about European parliament's architecture is just a symptom of the lack of communication. Laws are passed that then have to be implemented by member states. In those states, it has become routine to ‘blame' Brussels for any domestic ills. This happens in the U.S. as well, where blame is readily shifted by states to the federal government. But at least in the U.S., the federal government is fighting back with its own charm offensive. Depending on one's political persuasion, one may or may not like what comes out of Washington, but at least there's a dialogue. There are other challenges in the U.S., such that too small a portion of the population ever reads or views political news; but in Europe, where traditional evening news are still far more commonplace, European politicians fail in relaying their ideas to the public at large.

Voters in Ireland are sending yet another wakeup call to their elected representatives. Politicians better listen as populist politicians may seize the moment sooner rather than later to fill the gap.

In the meantime, what does it mean for Europe and the euro? Europe will never have a legislative and executive branch as effective as the federal government has in the U.S. Europeans like the resulting stability that most European member states have learned to cherish; Europeans don't like to have leaders that actually have power to get things done quickly, as they could overturn long cherished policies; the flip-side of that approach is, of course, that ill-perceived policies tend to live on.

Stability must not be mistaken with stagnation, which may result if the E.U. does not find an effective way to govern. We are not too concerned, as Europe has been around for a long time and will continue to be around; but we don't see a reason why Europe must find its way within a year or two – constitutional reform, even when packaged as “merely” a treaty, deserves to be done right. And, more importantly, the citizens of Europe deserve to be part of the process. When we raised similar issues in 2005, I was told that the issues at hand were too complex to be discussed with the public. When you treat your citizens like babies, don't be surprised if they throw a tantrum from time to time. More to the point, our outlook on the euro has not changed; any temporary weakness may be a buying opportunity, just as it was in 2005.

We manage the Merk Hard and Asian Currency Funds, mutual funds seeking to profit from a potential decline in the dollar by investing in baskets of hard and Asian currencies, respectively. To learn more about the Fund, or to subscribe to our free newsletter, please visit www.merkfund.com .

By Axel Merk
Axel Merk is Manager of the Merk Hard Currency Fund

© 2008 Merk Investments® LLC
The Merk Hard Currency Fund is managed by Merk Investments, an investment advisory firm that invests with discipline and long-term focus while adapting to changing environments.
Axel Merk, president of Merk Investments, makes all investment decisions for the Merk Hard Currency Fund. Mr. Merk founded Merk Investments AG in Switzerland in 1994; in 2001, he relocated the business to the US where all investment advisory activities are conducted by Merk Investments LLC, a SEC-registered investment adviser.

Mr. Merk holds a BA in Economics ( magna ***** laude ) and MSc in Computer Science from Brown University, Rhode Island. Mr. Merk has extensive experience and expertise in how the global financial imbalances, as evidenced by an enormous trade deficit, affect the markets. He has published many articles describing complex economic phenomena in understandable terms and he is a sought after expert presenter and moderator at conferences. Mr. Merk is a regular guest on CNBC, and frequently quoted in Barron's, the Wall Street Journal, Financial Times, and other financial publications.

In addition to 20 years of practical investment experience, Mr. Merk has a strong foundation in both economic analysis and computer modeling. His research in the early 1990s focused on the use of computer-aided models in financial decision making; he is a published author in “Adaptive Intelligent Systems” * and has been awarded a prize for excellence in economics. **

Mr. Merk focused on fundamental analysis of US technology firms in the early to mid 1990s, he diversified to other industries to manage volatility in his investments. In the second half of the 1990s, Mr. Merk received an early warning of the building bubble when he recognized that more and more companies were trading in tandem, causing the diversification offered through investing in other industries to diminish. As a result, he broadened his investments internationally. As the bubble burst and Greenspan and the Administration preserved US consumer spending through record low interest rates and tax cuts, imbalances in the global financial markets reached levels that Mr. Merk deemed unsustainable. Merk Investments has since pursued a macro-economic approach to investing, with substantial gold and hard currency exposure.

Merk Investments is making the Merk Hard Currency Fund available to retail investors to allow them to diversify their portfolios and, through the fund, invest in a basket of hard currencies.

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