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15 July 2015

The Emperor has no Clothes



I worked for a while at a very, very blue-blooded investment bank. One of the highlights(?) was a regular attendance of the credit committee. When it was somebody else’s business that was being debated, it was quite a good spectator sport, particularly for those who enjoy attack dogs getting the flavour of red meat. When it was one of one’s own counter parties (or prospective counter parties) getting the treatment, it was less amusing. It wasn’t actually a negative approach, but it was one that took as its guiding principle that if a customer of the bank were advanced a loan or a credit facility, the bank had to be absolutely satisfied that that customer was going to be in a position to make its repayments. There were, of course, lots of other considerations (the hoops that had to be jumped through before trading with certain Russian oligarchs were entertaining) but the ability to pay was always the paramount consideration. That bank has been in highly profitable existence for well over two hundred years, by the way.

Eurozone Meetings

I thought about those credit committee meetings when reading - yet again - about the Eurozone finance ministers seemingly endless meetings to discuss the problems of Greece, because the ability to repay appears to have been forgotten in the panic to make sure that the people at large never get to see that the emperor has no clothes. Theoretically, the discussions are about how to support the Greek economy, to help it get back on its feet and to see the country shrug off its problems and re-emerge, a healthy and vibrant part of the great Eurozone.

Well, now, call me old-fashioned, but I don’t think that endlessly increasing the amount lent will have that beneficial effect. Back to that bank credit committee, or indeed any discussion of something as simple as a mortgage advance: if the borrower can’t demonstrate that they will be able to meet the scheduled repayments, then the loan probably doesn’t make sense. And yet, the proposals to Greece always revolve around more loans - or bail-outs, as they are called, perhaps to stop it being so obvious. The fact that the previous loans have not been repaid should really be an indicator that new ones may suffer the same fate - failing some sort of miracle or lottery win.

Context

We need to look back a bit, here, just to get the context right. Some years ago, a bunch of EU functionaries decided it would be a good wheeze to propose that Europe should have a unified, single currency. Initially, most people didn’t take much notice, but they kept plugging on, through ups and downs. Two reasons - mainly - were advanced for this; one, the more European countries were drawn together, the less likely another pan-European war would be, and secondly that creating such a major currency bloc would strengthen Europe’s hand in negotiation and trade with the rest of the world, notably the US. (As an extra, it was noted that the US - of a similar size to a united Europe - had only one currency; surely Europe would just be doing the same?) In theory, that all sounds quite good. Nobody could possibly want another European war and a big, unified market would probably be good for trade. However, it is also worth pointing out that between 1815 and 1914 ( with a raft of currencies in use), there was no pan-European war; there was the Schleswig-Holstein fighting, the Austro-Prussian war and the Franco-Prussian war and certain unpleasantnesses on the south-eastern limits of Europe in the Balkans. None of those were major European events. And since 1945, it would be tough to dispute that the strongest force in protecting Europe from war has in fact been NATO. The US analogy is simply not valid; the US expanded westwards with its currency already in place - in other words, nation and currency moved in step; European nations pre-date the Euro by a very long time, so the simple expansion logic does not hold. The trade issue is more interesting, but again, not quite what it seems. Tariff barriers, regulation and local custom are probably far greater blocks to free trade than are different currencies. The EU overall looks at those issues; maybe the Euro saves some transaction costs, but in the grand scheme of international trade, I would suggest they are relatively insignificant.

Economic fact or political desire?

No, the reason they are trying to hide the poor old emperor’s lack of clothes is that the Euro cheerleaders have made a serious error. They have tried to make economic fact fit political desire. They want Europe to have a single currency, so, regardless of whether or not it works in terms of practical economics, it must be imposed. For a currency union to work, the underlying economies must be sufficiently similar that the necessary common considerations can be applied to them all; that means they must all be able to absorb the same fiscal constraints. What Greece is demonstrating on a daily basis is that it cannot operate under the same fiscal structure as Germany. That’s not an implied criticism of either of them; Europe should celebrate the differences between its constituent nations - that’s what makes it such a fascinating place. Instead, the eurocrats, instead of admitting to a serious error of judgement, would rather try and bludgeon people together in ways that will not work.

Full Integration?

We have a new Greek deal; good, so let’s start running the book on how long it will be before we need another one, because for sure we will. The Euro is an unstable political construct which cannot succeed without full political integration. I could be wrong, but I don’t believe the majority in Europe actually want full political integration. Recent history demonstrates, if anything, the opposite. Think Yugoslavia, Slovakia and the Czech Republic, (almost) Scotland and England, as yet unvoted Catalonia. It’s time the eurocrats put something ahead of their own self-importance and had a look at reality; a naked emperor may not be a pretty sight, but reality is healthier than constant self-delusion. The straitjacket of the Euro is getting close to putting all the positive things about European unity at risk; its wrongheadedness makes it a divisive force, not the unifying one its cheerleaders portray it as (increasingly unsuccessfully).

And the Greeks? Well, they couldn’t pay back the previous loans, so I’m not too hopeful that they’ll be any better placed if the debt burden gets higher under a new bail-out. And then, this morning, the IMF seem to share my view that piling debt on debt is unlikely to help the situation. Still, Juncker says it will all be fine…………….


As ever when I address this subject, I have to add the caveat that criticism of the Euro should not be assumed to imply a similar criticism of the EU itself; they are different things. 

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