Death Of A Currency

The EU crisis continues to roll on, now with even German bonds coming under pressure. And there seem to be mounting calls for a fiscal union. Here’s ECB executive board member José Manuel González-Páramo:

…we cannot completely delegate governance to financial markets. The euro area is the world’s second largest monetary area. It cannot depend solely on the opinions of ratings agencies and markets. It needs economic governance arrangements that are preventive and linear. This underscores my central point that a much more comprehensive approach to economic governance is now the priority for the euro area. And this means more economic and financial integration for the euro area, with a significant transfer of sovereignty to the EMU level over fiscal, structural and financial policies.

And former foreign minister and Green politician Joschka Fischer:

…Fischer urged Chancellor Angela Merkel on Friday to admit to Germany that ceding central bank independence and some sovereignty, and underwriting other states’ debts, was the inevitable price of saving the euro.

“There is no way round it: the price of the stability union will be a ‘transfer union’ and vice-versa,” Fischer told Reuters in an interview.

German critics of bailing out over-indebted members of the euro zone such as Greece call this process a ‘transfer union’, whereby fiscally-disciplined countries like Germany pay for the excessive debts and deficits of their European partners.

“You can’t have one without the other — that is the price of the euro,” said Fischer, who was a strong advocate of Europe as foreign minister from 1998-2005, when his Greens shared power with Gerhard Schroeder’s Social Democrats (SPD).

But is it at all likely that Merkel would agree to any such union, which would saddle Germany with southern Europe’s debts? And even if she (or anyone else) wanted to agree, wouldn’t it require treaty changes and parliamentary ratification and all that sort of thing? Isn’t it getting a bit late for that? In which case maybe we’re looking at the death of a currency:

No, what this is about is the markets starting to bet on what was previously a minority view – a complete collapse, or break-up, of the euro. Up until the past few days, it has remained just about possible to go along with the idea that ultimately Germany would bow to pressure and do whatever might be required to save the single currency.

The prevailing view was that the German Chancellor didn’t really mean what she was saying, or was only saying it to placate German voters. When finally she came to peer over the precipice, she would retreat from her hard line position and compromise. Self interest alone would force Germany to act.

But there comes a point in every crisis where the consensus suddenly shatters. That’s what has just occurred, and with good reason. In recent days, it has become plain as a pike staff that the lady’s not for turning.

People are now thinking the unthinkable, it seems.

What we are witnessing is awesome stuff – the death throes of a currency. And not just any old currency either, but what when it was launched was confidently expected to take its place alongside the dollar as one of the world’s major reserve currencies. That promise today looks to be in ruins.

Contingency planning is in progress throughout Europe. From the UK Treasury on Whitehall to the architectural monstrosity of the Bundesbank in Frankfurt, everyone is desperately trying to figure out precisely how bad the consequences might be.

What they are preparing for is the biggest mass default in history. There’s no orderly way of doing this. European finance and trade is too far integrated to allow for an easy unwinding of contracts. It’s going to be anarchy.

But others don’t see a break-up of the eurozone quite so grimly. Jeremy Warner in the Telegraph:

The currency team at Bank of America Merrill Lynch have taken a stab at what “fair value” would be for the major legacy currencies in the euro in the event of a breakup. And they’ve come up with some quite surprising results.

The conclusion is that Spain, Italy, Portugal and France are all overvalued against the US dollar as things stand, with Spain the most at around 20pc. That’s not so surprising, you might say, and if anything probably understates the true position.

But look at the countries thought to be undervalued. Ireland, on the Merrill Lynch analysis, is the most undervalued even though it is undoubtedly completely bust, while Germany, which conventional wisdom would say was massively undervalued as a result of its membership of the euro, is actually only quite marginally undervalued – by around 5pc.

…it’s possible that return to sovereign currencies wouldn’t be quite as traumatic as everyone assumes.

And Daniel Hannan:

Nor should leaving a currency union be any more complicated than joining one. I asked a Slovakian economist the other day how his country had managed the monetary transition when it divorced the Czech Republic. “Very easily,” he replied. “One Friday, after the markets had closed, the head of our central bank phoned round all the banks and told them that, over the weekend, someone from his office would come round with a stamp to put on all their banknotes, and that, until the new notes and coins came into production, those stamped notes would be Slovakia’s legal tender. On the Monday morning, we had a new currency.”

Sounds a bit of a doddle, really. If the eurocracy regard it as unthinkable, it may not be that it’s actually particularly difficult, but simply that they don’t want to see the end of their EU political project, with its perks and its power and its prestige.

About Frank Davis

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14 Responses to Death Of A Currency

  1. Wiel says:

    Good analysis, Frank.

    But let’s take another point of view on the situation. Let’s assume that the EU was a company (multinational). Let’s assume that we can compare bureaucrats with employees (I know this, and the previous assumptions, are unrealistic).

    First, from the beginning, I would have installed Business Intelligence (BI, the organisation’s dashboard with Key Performance Indicators – KPI’s) governance software to keep an eye on every nation (branch) and act when one of the KPI’s would get into the orange or red area. It looks like these speedometers did not exist and the EU got surprised that all of a sudden the (invisible) gauges had dropped deep into the red area.

    Secondly, entrepreneurs also act from an ideal view. They know what they want to reach in the near and distant future, but they never loose reality out of sight. Politicians are different: they live for their ideals (and their ego?) but don’t get hit in their wallet when things go wrong. After all, i’t’s not THEIR money, they’re working with (like entrepreneurs do), but deficits can easily be corrected by raising taxes. They have a power that entrepreneurs don’t have, raising their income by decrete.

    So I plea for more realistic people running something like a European Union, people who are touched personnally when they make errors running their organisations. Same for their civil servants: when they make errors, they may suffer consequences, like normal employees would experience after damaging their organisation.

    At least 80% of these governments should be run more businesswise. We would have less waste of money, less civil servants and more responsible behaviour…

    • Frank Davis says:

      I’m not in the least unsympathetic to such an approach: make government more like business. One might say (and you are indeed saying) that the EU is a badly-run business.

      But what is the business of government? What product are they selling? If government is in fact a business, selling a product or a service, why aren’t governments usually run as businesses, like pretty much everything else?

      I don’t pretend to have an answer. I’m just asking the question.

      • Wiel says:

        In my opinion they are a utility and services company and not the all knowing god that they pretend to be. But they are run like their civilians need to serve them, not the other way. In my view, the civilians are their clients because they pay them for their services.

        Every company’s existence is based on paid delivery of their services. Strange enough, a major group of the goverment’s clients (smokers) keep paying more every year for less services. What real company would get away with such an approach?

  2. harleyrider1978 says:

    A business wouldnt hand out welfare checks! it would layoff first to keep itself solvent!

  3. Rose says:


    In case you haven’t seen this.

    From Watts Up With That?
    Using photoshop to turn steam into smoke.

    Lessons Learned From Tobacco Control Should be Applied to Climate Policy
    “The approach the world has taken to tobacco control holds many lessons for the COP-15 Climate Change Conference in Copenhagen. A newly-published article in The Lancet (available with free registration) summarizes the many similarities between tobacco control and climate policy, and how the lessons learned from tobacco control can be applied to the way countries approach climate policy.”

  4. Kevin says:

    “It cannot depend solely on the opinions of ratings agencies and markets.” So sayeth the unelected Portuguese communist.

    The plan is to ban ratings agencies from rating countries that are in a financial hole. I’m not quite sure how on earth the EU is going to manage that as the agencies appear to be US based. Anyway, be that as it may, if they were to succeed with this Baldrickesque plan, how, exactly, are lenders going to do their due diligence on which to base their investment decisions? The short answer is that can’t and so they won’t invest. It really would be investing in a pig a in a poke and so it’ll just end up making matters worse.

    Being a commie he just doesn’t understand the markets; bless.

  5. Fredrik Eich says:

    Frank,I know that you have no telly, but but do you ever watch Max Keiser on RT?

    I find it amusing because he accuses very well known people of fraud and terrorism and somehow never gets sued. I assume this is because he is (mostly) right.

    • Frank Davis says:

      No I haven’t seen it. I’ll take a look. Online of course.

      Update: I took a look (at the episode about Richard Branson and his shiny teeth). Are they all like that? Seemed pretty left wing, with people talking about Occupy and Smashing The System and so on. I’ve been hearing stuff like this for too, too long. I don’t have much time for Richard Branson – not because he’s rich, but because he’s antismoking.

      • Fredrik Eich says:

        Well, Max himself is pretty disdainful of big T and smokers. I am not really sure if he is left wing or not and I don’t always agree with him. I think RT is bias against the “west” but I also think it a great advance that now we have the propaganda of other political blocs as well as the propaganda of our own bloc (BBC). As for “occupy” movements, I think I am right in saying that Max K thinks that the protests should be against the fraud in capitalism and not capitalism itself. I am not sure that all the “occupy” movements really know what they want themselves.

  6. harleyrider1978 says:

    Bank of America Merrill Lynch

    Both of these companies went bankrupt in 08 and were only back at work after the government bailed them out. Merryl was bought and most of its top heavys were sent packing. BOA has had the governments ear for quite some time,handling most of fanny and freddys loans and other govmnt back housing loans like ky finance,veterans refianance……….what Im getting at is OWEbamas folks run these outfits either by puppetry or direct contact.They cant be trusted on exchange values.

  7. Gary K. says:

    Still, look at the bright side.

    You Brits will be making a lot of money renting to the hordes that will flock to the UK to avoid the chaos across the Channel. :)

  8. harleyrider1978 says:

    I love it,who needs the BBC when youve got Franks Blog LIVE! EU RIOTS,freedom its worth rioting over.

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