January 12, 2000
The
Coming Euro-Crash
Why
the European Union is going to really hate the French
THE WORST EUROPEANS
The French are starting to get a bad reputation in Europe. The only reason for this is that instead of being "communitaire" they are acting in the interests of their countrymen. The French are said to be the worst offenders when it comes to implementing EU "laws." An example that is especially apt to the British is the refusal to import British beef because they do not regard British beef as being fully clear of BSE. Ignoring for the moment the role of the French in pushing for greater regulation of all other countries, there is a welcome, if obstinate, cussedness in the French government’s behaviour. However, this is not the case if you are sharing a currency with the French, as we shall see later.
THE CINDERELLA CURRENCY
The Euro has not been doing well on the money markets. This was evident after a first ecstatic week when the great and the good claimed that the Euro was obviously good because it increased in price. Then they claimed that it was obviously good because it declined in price. The simple fact is that the Euro is bad not because it is too high or too low but that it is reliant on various economies and, crucially, on various central banks. The last factor seems to have been overlooked by most analysts who take at face value the control of the European Central Bank (ECB), a government monopoly of money with absolutely no democratic comeback. Now many readers are probably private currency advocates, as am I, but the ECB combines the worse of both private and public monetary models. They have overlooked one factor; the power to print money is not at the moment in the hands of the ECB but in the hands of the national banks. This may explain some of the weakness of the Euro, and will explain the toilet paper status of it once the markets work out what is being done.
THE DINAR DESTINY
The Euro is not, as many mistakenly warn, a unique experiment. A federal currency has been tried before, but not surprisingly the Eurocrats are unwilling to point this out. In the dying days of Yugoslavia, a remarkably similar set up was put in place as it is with the Euro. The Yugoslav Central Bank had power to determine the money supply in the framework of a tight anti-inflationary policy, but the power to print the notes had been delegated to the states. The monetary squeeze was problematic for Serbia, in that Slobodan Milosovic had made extravagant promises in relation to state employees and pensioners, and the money to pay them was not there. The usual way out, to set the printing presses rolling was not available to him, or was it? The fact was that although officially not allowed to print any more than their allocated share of notes, there was nothing stopping the Serbian government from printing the required currency in private. Although the extra money had fed through, partially, to the Dinar’s exchange rate, it was not until the bad faith of the Serbian government had been exposed that the Dinari collapsed in value.
THE FRENCH MIRACLE
Any attempt to compare Yugoslavia to Europe flounders on the fact that Europe is somewhat more developed and sophisticated than Yugoslavia. This does not mean that the pressures on Europe are less intense. The European Central Bank, it is true, has set the amount of currency that is allowed to be printed, but the national banks are to do the printing. This has special potency when considering the case of France. France’s Socialist government has recently insisted that all employees are to have a maximum thirty-five hour week. Other areas have also been legislated on, covering taxes, holidays and minimum wages, most to the detriment of the employer. What should happen? Unemployment should shoot up. What did happen? Unemployment has gone down. This has, to say the least, baffled many economic commentators. As any Catholic or Evangelical Protestant knows, miracles are not explicable by rational analysis alone, and in this sense, the French recovery is definitely miraculous. Some commentators claimed that the economic laws of gravity do not apply to France, or were wrong in the first place. Some have said that that the laws were more employers friendly than appear at first. Others have tried to say that with an upturn in the economic cycle scheduled; they did not need to worry about employer friendly legislation.
THE EURO DID IT
There is a fourth explanation, that the Euro has helped France. Many of these commentators, like the brain-dead British foreign secretary Robin Cook, have claimed that the very presence of the Single Currency has boosted the French economy, like a good fairy Godmother. The pro-Europeans may be uncharacteristically right, although characteristically for the wrong reasons. The French are now in the Euro, and now control the printing presses for the Deutschmark, well not quite, but with a fixed exchange rate it has the same effect. A modest inflation in the Franc will not immediately show, as it is translated into other European currencies at an artificial rate. For a government intent on reelection, it seems to have found the Holy Grail, growth without consequence. The voters will not punish them for cutting welfare or working rights and the markets will not punish them, much, as long as they are not found out.
TRICKY TRICHÉT
There is also a personal point in this. The governor of the Banque de France, Jean-Claude Trichét, is bored. He wants the more important job of head of the ECB. Unfortunately the job is taken by a monetarist, but unproven, Dutchman, Wim Duisenberg. When Herr Duisenberg was forced upon the ECB by an alliance of the Germans, British and the capital markets, France took umbrage. The Gallic delegation refused to endorse Duisenberg, although he was the choice of all the other governments, unless their man M Trichét was allowed the second half of Duisenberg’s term. Sadly, the head of the European Central Bank is hired on an eight-year basis, not on the four-year basis that the Heads of Government agreed. This means that there is no legal reason for Wim Duisenberg not to stay on, if he were successful there would be a very good reason for him to leave. Wim Duisenberg must be persuaded to stand down for a more serious figure, the governor of the Banque de France perhaps? This is not to say that France is undermining the Euro just to provide a job for M Trichét. Even the French would not do that. However if the French Government were to request an increase in the amount of Francs in circulation, M Trichét has little motive to refuse.
THE GOOD NEWS
The very reason why this is possible, is the same reason it could be so destructive. The Franc is no longer just the currency of France, but part of a fixed exchange rate in Europe. The Euro as successor to the Deutschmark is one of the four most traded currencies in the world. A collapse in the Euro would not have the same purely local effect as the collapse in the Yugoslav Dinari. On the other hand, it would kill European Unity for a few more years, and that has to be worth a global financial meltdown. As Lenin said, cheer up, things are getting worse.
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