No-One Is Leaving the Eurozone
已有 9134 次阅读 2010-05-29 08:34No-One Is Leaving the Eurozone
By Marc Chandler
RealMoney Contributor
5/28/2010 10:45 AM EDT
URL: http://www.thestree t.com/p/rmoney/ currencies/ 10769065. html
Large numbers of market observers -- and even more armchair pundits -- believe they know the solution to what is plaguing Europe and threatening the already fragile financial system and world economy. The answer is simple, they say: The nature of these fiscal and competitive problems requires Greece to exit European currency union. Others suggest that if Greece does not "do the right thing," then Germany itself may choose to exit. Although the folks suggesting this may be otherwise intelligent people -- perhaps, even, with some good investors or traders among them -- they simply misunderstand the problem. Neither Greece nor Germany is about to pull out of the anything. Greece The general idea, as it applies to Greece, is that the country needs to reduce its debt and boost its competitiveness. The way for Greece to go about this, or so goes the argument, is to drop out of monetary union, reintroduce the drachma, or something similar, and allow the currency to depreciate. While this sounds like a compelling idea, it is a terribly flawed and dangerous one. The mere act of Greece dropping out of the euro would not convert the country's debt into its new currency. On the contrary, Greece would still owe more than EUR250 billion . Furthermore, that debt would be significantly more difficult to repay, because the new currency would depreciate in value, an eventuality that is part of the argument for abandoning the euro. In a word, introducing a currency for the sole purpose of debasing it is a recipe for disaster. Few historical examples come to mind, but Ecuador tried a somewhat similar move several years ago. The new currency was rejected not only by foreign investors but, more important, by domestic businesses and shopkeepers. There is no guarantee that a new Greek currency would be accepted. And if it were not, the current crisis in Greece could look like a tea party -- and not the kind that Fox News helps organize. "Ah," you may be asking, "but won't a weaker currency allow Greece to boost its competitiveness and its exports?" For sure, a weaker currency could do those things, but not necessarily so. Without robust analysis, it is difficult to know a priori how sensitive Greek exports are to the value of the country's currency. Maybe a better predictor of Greek exports would be the growth rate of the importing country. Moreover, the price of money adjusts much more quickly than the price of goods. This is an important component of what economists call the "J-curve" effect. Following currency depreciation, the goods that had been previously ordered, along with those in transit, are associated with the previous prices (exchange rates). Frequently, therefore, in the midst of depreciation, countries will initially experience a deterioration intheir trade account. Lastly, regardless of the competitive advantage Greece might gain with a weaker currency, this would be quickly lost to higher inflation. The decline in the British pound , for example, has not been very helpful to the UK (the UK is a member of the European Union, but not of the euro). The U.K. trade deficit three-month moving average has deteriorated markedly over the past year or so as sterling has fallen. This moving average, which helps smooth out some of the noise in the data, peaked at a deficit of GBP1.95 billion in December 2008. The most recent data to March showed a three-month moving average deficit of GBP3.22 billion. The following, then, is a summary of what Greece would most likely experience were it to leave the euro. The new currency, if it were even accepted, would be weak. Interest rates would be significantly higher. The banking crisis would be catastrophic. The government would likely default on its euro debt, thus intensifying the financial crisis in the Eurozone, which is where Greece's main creditors are located. The economic slump would deepen dramatically, even as inflation leapt. In addition, the public backlash would create social unrest and political instability that could potentially threaten even the country's democratic institutions. In essence, Greece's problems would multiply -- and all this, quite possibly, without much accompanying benefit. Germany Europe's sovereign debt crisis is much bigger than Greece alone. Germany has the biggest and most competitive economy in the region, and it is always on the speed dial of those looking for funds for their favorite European causes. Maybe, some argue, Germany should leave and reintroduce the Deutschmark. Otherwise -- as seen earlier this month, when it was outmaneuvered by France -- Germany will be forced to make further commitments that it might not want to make. What the advocates of this strategy do not fully grasp is that the euro was, at the start, an economic solution to a fundamentally political problem: Under what conditions could France, and the rest of Europe, permit a reunification of Germany? The answer, as hammered out by heads of state of both Germany and France, was that the former would have to share its über-mark, well as the Bundesbank's anti-inflation credentials (which translates into low interest rates), with the rest of Europe. Voilà, as the French would say: Monetary union was the basis for German reunification. We may like to characterize our age as post-Cold War, or post-September 11, but it also is fundamentally post-World War II. In this age, a largely pacifist Germany has wedded itself to Europe, and its vision and future are embodied in Europe. If there were an alternative, perhaps abandoning the euro could be part of a cost/benefit analysis. The German constitution may have denied its people a referendum on the euro in the first place. Now that the single currency is a fact, however, Germany cannot go back to status quo ante without risking a redivision of Europe. The formerly warring tribes of Europe have enjoyed nearly two generations of peace, one of the continent's longest calm periods in centuries. It is predicated on integration, which is something like a couple trying to live together -- except that, in this situation, it involves 16 countries (with the possibility of another in January). It takes quid pro quos as well as modus vivendis, or agreements to disagree. Perhaps, then, integration is a bit like what Otto von Bismarck famously said of laws and sausages: Maybe it is best not to see how they are made
By Marc Chandler
RealMoney Contributor
5/28/2010 10:45 AM EDT
URL: http://www.thestree t.com/p/rmoney/ currencies/ 10769065. html
Large numbers of market observers -- and even more armchair pundits -- believe they know the solution to what is plaguing Europe and threatening the already fragile financial system and world economy. The answer is simple, they say: The nature of these fiscal and competitive problems requires Greece to exit European currency union. Others suggest that if Greece does not "do the right thing," then Germany itself may choose to exit. Although the folks suggesting this may be otherwise intelligent people -- perhaps, even, with some good investors or traders among them -- they simply misunderstand the problem. Neither Greece nor Germany is about to pull out of the anything. Greece The general idea, as it applies to Greece, is that the country needs to reduce its debt and boost its competitiveness. The way for Greece to go about this, or so goes the argument, is to drop out of monetary union, reintroduce the drachma, or something similar, and allow the currency to depreciate. While this sounds like a compelling idea, it is a terribly flawed and dangerous one. The mere act of Greece dropping out of the euro would not convert the country's debt into its new currency. On the contrary, Greece would still owe more than EUR250 billion . Furthermore, that debt would be significantly more difficult to repay, because the new currency would depreciate in value, an eventuality that is part of the argument for abandoning the euro. In a word, introducing a currency for the sole purpose of debasing it is a recipe for disaster. Few historical examples come to mind, but Ecuador tried a somewhat similar move several years ago. The new currency was rejected not only by foreign investors but, more important, by domestic businesses and shopkeepers. There is no guarantee that a new Greek currency would be accepted. And if it were not, the current crisis in Greece could look like a tea party -- and not the kind that Fox News helps organize. "Ah," you may be asking, "but won't a weaker currency allow Greece to boost its competitiveness and its exports?" For sure, a weaker currency could do those things, but not necessarily so. Without robust analysis, it is difficult to know a priori how sensitive Greek exports are to the value of the country's currency. Maybe a better predictor of Greek exports would be the growth rate of the importing country. Moreover, the price of money adjusts much more quickly than the price of goods. This is an important component of what economists call the "J-curve" effect. Following currency depreciation, the goods that had been previously ordered, along with those in transit, are associated with the previous prices (exchange rates). Frequently, therefore, in the midst of depreciation, countries will initially experience a deterioration intheir trade account. Lastly, regardless of the competitive advantage Greece might gain with a weaker currency, this would be quickly lost to higher inflation. The decline in the British pound , for example, has not been very helpful to the UK (the UK is a member of the European Union, but not of the euro). The U.K. trade deficit three-month moving average has deteriorated markedly over the past year or so as sterling has fallen. This moving average, which helps smooth out some of the noise in the data, peaked at a deficit of GBP1.95 billion in December 2008. The most recent data to March showed a three-month moving average deficit of GBP3.22 billion. The following, then, is a summary of what Greece would most likely experience were it to leave the euro. The new currency, if it were even accepted, would be weak. Interest rates would be significantly higher. The banking crisis would be catastrophic. The government would likely default on its euro debt, thus intensifying the financial crisis in the Eurozone, which is where Greece's main creditors are located. The economic slump would deepen dramatically, even as inflation leapt. In addition, the public backlash would create social unrest and political instability that could potentially threaten even the country's democratic institutions. In essence, Greece's problems would multiply -- and all this, quite possibly, without much accompanying benefit. Germany Europe's sovereign debt crisis is much bigger than Greece alone. Germany has the biggest and most competitive economy in the region, and it is always on the speed dial of those looking for funds for their favorite European causes. Maybe, some argue, Germany should leave and reintroduce the Deutschmark. Otherwise -- as seen earlier this month, when it was outmaneuvered by France -- Germany will be forced to make further commitments that it might not want to make. What the advocates of this strategy do not fully grasp is that the euro was, at the start, an economic solution to a fundamentally political problem: Under what conditions could France, and the rest of Europe, permit a reunification of Germany? The answer, as hammered out by heads of state of both Germany and France, was that the former would have to share its über-mark, well as the Bundesbank's anti-inflation credentials (which translates into low interest rates), with the rest of Europe. Voilà, as the French would say: Monetary union was the basis for German reunification. We may like to characterize our age as post-Cold War, or post-September 11, but it also is fundamentally post-World War II. In this age, a largely pacifist Germany has wedded itself to Europe, and its vision and future are embodied in Europe. If there were an alternative, perhaps abandoning the euro could be part of a cost/benefit analysis. The German constitution may have denied its people a referendum on the euro in the first place. Now that the single currency is a fact, however, Germany cannot go back to status quo ante without risking a redivision of Europe. The formerly warring tribes of Europe have enjoyed nearly two generations of peace, one of the continent's longest calm periods in centuries. It is predicated on integration, which is something like a couple trying to live together -- except that, in this situation, it involves 16 countries (with the possibility of another in January). It takes quid pro quos as well as modus vivendis, or agreements to disagree. Perhaps, then, integration is a bit like what Otto von Bismarck famously said of laws and sausages: Maybe it is best not to see how they are made
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