On the speculation against the Euro

2011-09-16

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Speculation against the euro exists for three reasons. No central powers, unhealthy banking system, lack of system-wide rational strategy. Image Source: SPM

Many are those who argue that the speculation against the euro is groundless (or “biased”) since overall indicators of public debt are far lower in the Eurozone than the USA and Japan. This mode of thinking would have made perfect sense if the Eurozone was functioning as a single unified political entity with all the necessary stabilizing mechanisms and powers of centrally dealing with the crisis. As we all know the Eurozone, not only does not function as a single entity, with all this cacophony of every politician expressing his/her own country’s agenda, it also lacks any central agencies of raising funds, of a unified budget and fiscal policy and above all of a surplus recycling mechanism.

The “fiscal rules” alone that the Euro has do not provide any stable ground and everyone knows that, since without fiscal coordination and productive recycling of surpluses no currency area/union can stay together since its constituent economies will not be able to converge and will greatly diverge instead (what we now have). It is thus meaningless to compare the Eurozone, a half-built edifice, with the USA and Japan who are states in the proper sense. It even more absurd for EU officials to speak of groundless speculation based on such comparisons.

Speculation against the Euro exists for three reasons. The first is the lack of central powers, resembling those of a state, that would stabilize economies in order to prevent asymmetric shocks. The second is the ill-regulated, quasi-bankrupt banking system of the Euro that is flooded with toxic paper. The third is the lack of a rational plan to deal with the current crisis and instead the existence of ill-advised, ad hoc half-measures that only postpone a solution (see The real reasons EU delays a solution to the Euro crisis).

First, fiscal union.Given the constraints that are in place a fiscal union today is unfeasible and any discussion of further integration and the need for a new Treaty is unrealistic, as such processes are cumbersome and by the time they are concluded the euro will belong to history (see Federalism for the future – Realism for the present). Thus our leaders must find ways to act within the current institutional framework and with the mechanisms that are in place, which are enough to deal with the current crisis is used properly and efficiently. A new strategy that will take full advantage of the existing tools can be formulated and can be put into practice within weeks.

Second, the banking system of the Euro. It is a very unhealthy system, as it was never cleansed of its pre-2008 toxic derivatives and it has ever since accumulated more of it in the form of sovereign bonds from nearly insolvent states. In the Euro area we never had a toxic cleansing mechanism similar to TARP (Toxic Assets Relief Programme) in the US (see More on the insolvency of the European Banking System). For as long as it remains as it is, investors will continue to remain nervous and thus speculation will remain wild.

Third, a rational plan to deal with the current crisis. We do not have a rational plan to deal with the crisis only a series of ill-advised half-measures that do more harm than good. The reason is that our leaders are obsessed with their much-vaunted fiscal discipline delusions and fail to see that the crisis is systemic and apart from the sovereign debt, we also have an unhealthy banking system and we lack any growth strategy. The crisis is triple (a) debt crisis across the eurozone, (b) quasi-bankrupt banking sector crisis, (c) under-investment crisis, all over the euro area, with few exceptions, but especially in the periphery. The half-measures our leaders agree to from summit after summit only address point a. The other two are not even mentioned. A rational plan would address all three realms of the crisis at once, thus succeeding in calming down the markets who will witness and end to Europe’s dithering (see Time for a Euro-wide strategy to deal with the systemic crisis).

There are other issues that could also be listed here but I uphold that the above are the most important. If those are addressed then the rest will be completely marginal and ancillary.

Speculation exists because of these reasons and will continue to go wild, for as long as our leaders do not address the real problems that we are facing. Any voice that advocates that the speculation against the euro is groundless has simply not taken into account the malignancies of the euro architecture and has thus fallen into the misleading process of comparing things/entities that cannot be compared.