Speculation is already rife about what might happen on Monday following Sunday’s vote in France. One small detail that I hadn’t thought about before, Monday is a bank holiday in the UK, so most traders won’t be working, Bloomberg’s Mark Gilbert feels that could even add to euro volatility.
One thing that is clear is that there are a mounting catalogue of issues to fuel ‘negative sentiment’ next week. The latest of these is the reported statement from German CDU EU spokesman – Peter Hintze – that if the French vote no, then the entry of Bulgaria and Rumania should be temporarily suspended.
“Our position is clear: inclusion of Bulgaria and Romania must be put off if the French vote no,” said the party’s parliament spokesman on the EU, Peter Hintze, in a telephone interview today.
So on May 30th we may have an EU where in one of the main countries the electorate have just passed an effective motion of ‘no confidence’ in their government, whilst in another of the ‘key states’ the existing government already has a ‘sell-by’ date. Add to this the uncertainty over deficits and the SGP, the absence of growth, and the growing unease about what exactly is happening at the ECB and, if you ask me, you have all the ingredients of a major currency crisis. Well, next week we’ll know.
i would agree the fear and loathing of the euro is great, but at 1.25 it is a punt, a throwaway bet that on memorial day, there will be no liquidity and the euro will remain intact. this reminds me of the meech lake accord “votes” to break up canada, and its subsequent vote on same topic from the party quebec which roiled the looney before the vote, and generated a nationalst pride rally afterwards.
Currency crisis? Not a full blown one, but I think there will be speculative but ill-founded (too early) flight from Euro assets.
Nice opportunity really. Certainly, however, much depends on what happens in reaction in Bruxelles. If they try to blow hard their way through with the same game played to date as per Juncker et al, well…. They might just play Titanic with the EU (iceberg, bah, there is only one course, full speed ahead!).
I see the German anti-enlargement brigade are out in force. Romania and Bulgaria’s accession to the EU has absolutely nothing to do with the Constitution.
I don’t see the problem. Is a lower Euro not good for the European economy? Also turnout with the Dutch referendum is very important. If it is low than the politicians will ignore it but if it is high than they have a problem.
With Romania and Bulgaria it is also only land. Most of the people seem to already be in the EU
“I don’t see the problem. Is a lower Euro not good for the European economy?”
In many ways it is. The problem is the confidence factor. If the euro goes down in an orderly retreat, then that’s fine. If it is a confidence crisis, then this will be another issue. We have to wait.
Another way of looking at this is that the French in voting no will be effectively ‘revaluing’ the renminbi. As the Chinese currency will rise, in fact it already is rising, against the euro. The problem is that the US is cuaght in the middle, this is where the tensions will mount.
Am I being naive in assuming that the currency market has already factored in the likely NO votes and that if the reality matches the prognosis the Euro will not have a significant negative reaction.
Any surprises could easily cause a strong reaction (e.g., rise) in the Euro.
“Am I being naive in assuming that the currency market has already factored in the likely NO votes and that if the reality matches the prognosis the Euro will not have a significant negative reaction.”
No, this is a good argument, a no is being anticipated, and of course you are right, if there is a yes, then the market can bounce back a bit, on this front (there are others remember, this is only one aspect).
But maybe they haven’t fully appreciated the confusion which might abound on Monday morning. Who will be the authoritative voice to speak on behalf of Europe? Tony Blair? Both Chirac and Schr?der are going to be tarnished by this vote among other things (like German elections).
And again with all the attention that is being lavished on the US deficit problems I think there is a real problem of focus, the debates I see in the US at present, and this must be reflected in other parts of the world, are extraordinarily naieve about what is happening.
It also depends on what the oil price does. If it behaves as if the price is really set in Euro’s instead of dollars than the longterm outlook is different.
today in paris :
forecast 55% NO
fnancial market highiest in 3 years mostly because Euro is weaked by the french referendum
dont panic and we will make a nice core europe (without Turkey, Brit and east europe countries), the only working way
Let’s look at the facts. In 1979 Britain was widely described as the sickman of Europe. According to Eusostat, it is now one of the most affluent EU countries by the standard of GDP per capita:
http://epp.eurostat.cec.eu.int/cache/ITY_PUBLIC/2-03122004-BP/EN/2-03122004-BP-EN.PDF
Inner London is the wealthiest region in Europe by far:
http://epp.eurostat.cec.eu.int/pls/portal/docs/PAGE/PGP_PRD_CAT_PREREL/PGE_CAT_PREREL_YEAR_2005/PGE_CAT_PREREL_YEAR_2005_MONTH_01/2-25012005-EN-AP.PDF
GDP growth rates in France, Germany and Italy, the major mainland economies in the EU, are miserably low:
http://epp.eurostat.cec.eu.int/pls/portal/docs/PAGE/PGP_PRD_CAT_PREREL/PGE_CAT_PREREL_YEAR_2005/PGE_CAT_PREREL_YEAR_2005_MONTH_05/2-12052005-EN-AP.PDF
By end 1995, Britain’s standardised unemployment rate was lower than in France, Germany or Italy and its rate of employment of working-age people higher.
Compare recent unemployment rates in the Eurozone and Britain (UK):
http://www.oecd.org/dataoecd/41/13/18595359.pdf
“As an internationally comparable measure of inflation, the CPI shows that the UK inflation rate has been among the lowest in the EU since the start of 2000. The estimated inflation rate for the enlarged EU 25 in March was 2.1 per cent, compared with 1.9 per cent in the UK.”
http://www.statistics.gov.uk/CCI/nugget.asp?ID=19&Pos=3&ColRank=2&Rank=176
yes it an example (thank to Tatcher), but with Sarkozy in France and CDU in Germany we can expet a great improvement.
could you find some statistics about the quantity of British who come in france to take benefit freely of our healthcare system ? 😉
WE must create a core europe only with the euroarea and try to fiind a way to improve our quality of life, the rest of the world can go to hell.
Invoke the spirit of Robespierre and create the virtuous society in Europe.
Edwards, these post and comments and responses are superb. Worrying, but superb. You are simply terrific, though I am always trying to think around you 🙂
In parts of Europe, it can seem that not a lot has changed since Fr?d?ric Bastiat wrote this satirical piece in 1845:
http://bastiat.org/en/petition.html
Why Britain is doing so well has more to do with the industry the country is strong in. Britain is a very big player in finance and that has been a industry which grew a lot in the last 15 years. Add to that the overvalued pound and it is not surprising that GDP per capita of Britain looks so good.
I really have to admit that I feel a bit frustrated about this debate. Frustrated with myself, since I am not sure I am able to put across what I am arguing.
I think it is important to note that I am trying to argue that the euro is ‘overvalued’. I have been arguing this consistently since 2002, here and in other places (afoe didn’t exist in 2002 :)).
What the ‘real’ value of the euro is is hard to say. Stephen Jen at Morgan Stanley suggest 1:1 euro/USD. That sounds about right. The problem is made more difficult by the artificial rise in the dollar 1995 – 2000 induced by the internet bubble.
But if we look at the comparative growth and inflation rates of the US and German economies 1995 – 2005 then something like 1:1 wouldn’t be a bad guess.
So I am arguing the euro needs to come down: YES.
So that means that a ‘no’ on Sunday will be a good things, well, NO. And for *two* principle reasons.
Here’s the first one, which European readers will find hard to appreciate. A rapid decline in the euro will put a lot of strain on the dollar, on the US current account deficit (although this depends on what happens as a consequence to a broader range of currencies), and on the US disinflation process. It can also, if accompanied by a drop in ECB rates, make it difficult for the US Fed to raise rates, and this can fuel even more the US housing boom.
Why should Europeans worry about this: simply put because Germany depends on exports. The US-China conveyer belt is driving global growth, and anything which upsets this – like growing protectionism and anti-China sentiment (the US has its China, and the EU has its Turkey) – can unhinge everything. We need to tread very carefully, since we are, at the end of the day, all locked together. This is what globalisation implies. So we should be worried about anything which can harm global confidence, and global growth.
Which brings me to the second argument on why a ‘no’ on Sunday won’t be good news: an orderly reduction on our part, with the ECB with its hand on the tiller, would be no bad thing. But if we drop suddenly, because of a loss of confidence, this will definitely be negative, and undoubtedly produce all sorts of internal debates which it might be better not to have just in this moment:
eg Fits Bolkestein has said he would not have backed the introduction of the euro had he known France and Germany were going to ignore the stability pact that underpins the currency.
“If I had known then what I know now, I would not have advised my party [VVD] to vote for the currency”.
In the coming days we are likely to see more of this.
on the US current account deficit
Many have argued that this is an artifact Asian central banks have created. Wouldn’t they scale back on buying dollars?
Germany depends on exports
So you neither want a sudden upwards correction as a result of an unexpected YES? I guess you can’t have it both ways.
Fits Bolkestein has said he would not have backed the introduction of the euro had he known France and Germany were going to ignore the stability pact that underpins the currency.
Out of interest. Has anybody ever have examined how to leave the Euro? I mean in a mechanical way, the old banknotes are gone. Also you hardly can do a public discussion or even a secret discussion of this in government. Once something leaks you’ve killed the currency whatever you’d have decided otherwise.
“Many have argued that this is an artifact Asian central banks have created. Wouldn’t they scale back on buying dollars?”
This Oliver is the *big* question. My feeling is nobody really knows. I haven’t made up my mind exactly what I think yet, when I do, I’ll post something.
Meanwhile, if you’re really interested in this, you’re on the wrong blog :).
You should go to:
http://www.roubiniglobal.com/setser/
This afternoon should be a good time:
“I’ll try to chime in with some thoughts on Bretton Woods two late tomorrow — [UPDATE — MAKE THAT FRIDAY]”
The thread should be warming up anytime soon. In the red corner Roubini/Sester and in the blue Michael P. Dooley, David Folkerts-Landau and Peter Garber. If no-one defends the latter I might just do it myself, on a devils advocate basis of course. I just can’t see how China can get of the dollar assets high-roller myself.
Not now at any rate. Of course in ten years time…………
“Out of interest. Has anybody ever have examined how to leave the Euro?”
No, definitely not.This is clearly a taboo subject. In theory it is impossible. If people stared talking about it, that would already imply it was an active option.
That is why, for example, it is highly significant that some people are even begining to speculate that Italy might leave.
Really all of this puts economists in a very complicated ethical position. You see, even mentioning it, you can be accused of encouraging it. The whole game, and it is a game play, is to keep the markets convinced that it is impossible to leave. On the other hand if economists say nothing, then a lot of ordinary decent people get to lose a lot of their money without warning.
If you want to see how the mechanism works you would have to go back to Argentina 2001. Effectively Argentina was in a currency union with the US. Pesos were convertible on a 1:1 basis with dollars and guaranteed by a currency board. If you wanted dollars for your pesos you just had to join the line outside the currency board offices and demand your ‘swap’. Of course at the end the queues were enormous.
Now, in the case of Italy, it could be like this.
You choose a bank holiday, and the first indication the average person in the street has is that the bank holiday is extended for the whole week. Actually all the people who follow economics see this coming ages before, but the average person is taken ‘unawares’, they simply can’t imagine it could happen. So much for ‘perfect information and foresight’.
What happens next is some money is quietly printed somewhere. Often forms of near, or scrip money are used. Eg the government can pay its emplyees in iou’s which the shops have no alternative but to accept or they have no customers.
Euro notes are protected, of course. Lets say Italy introduces a New Lira. Then the next Monday you can go to the bank with your euro notes and change them for New Lira: at 2 lira per euro, because of course the whole objective here is to devalue.
Now the trick is the bank accounts, in particular the deposit accounts: they will be converted 1:1 so people find the real value of savings cut in half (this is of course just an example).
There are lots of demonstrations and protests, but effectively people cannot do anything, the money is lost.
The real problem comes with the sovereign debt, which is denominated in euros, and individual indebtedness (eg your mortgage). These cannot be converted 2:1 since Italy would fall into huge debt deflation, but if they are converted 1:1 the banking system goes bust, and the foreign holders of government debt are threatening the Italian govt something mighty.
So you have a long lasting ‘negotiating period’.
OK this was just a review, a hypothetical one. Do I think it could happen in reality: a definite yes.
How was it done when Checoslovakia parted in Chekia and Slovakia?
What about accounts in other EU member banks by Italians? And what of foreigners diposits in Italian banks?
DSW
“How was it done when Checoslovakia parted in Chekia and Slovakia?”
The truth is, I don’t know.
“What about accounts in other EU member banks by Italians?”
Not affected, the Eurozone is not a country. Just like intelligent Argentinians who had dollar accounts in New York.
“And what of foreigners diposits in Italian banks?”
Losers probably, unless they denominate the accounts as something like non-resident dollar accounts. I don’t know enough about banking law here. But being a Spanish citizen with a euro governed account governed by Italian law wouldn’t give you any protection if this were to happen I’m afraid.
Obviously and basically there would be a hell of a mess.
On another front the argument continues about pricing in:
“The euro rose from a seven-month low against the dollar on speculation the currency’s four-week drop is an overreaction to the probability French voters will reject the European Union constitution in a referendum on May 29.”
“Lehman’s Call
The euro may rise to $1.30 should French voters unexpectedly approve the EU treaty because investors are expecting a rejection, said Lehman Brothers Holdings Inc.
Europe’s currency is likely to rise more on a “yes” vote than it would drop on a defeat because “a ‘no’ vote is probably about 80 percent discounted by investors,” wrote James McCormick, Lehman’s London-based head of global currency research, in a report to clients yesterday.
“A `yes’ vote, which is not discounted, would probably have a more pronounced positive effect on the euro,” he wrote.”
http://www.bloomberg.com/news/markets/currencies.html
Expectation was that the currency of Slovakia would decline relative to the other but that didn’t happen, atleast for the first decade, i don’t know how it is doing now but that doesn’t really matter.
Claiming that Argentinia was in a currency union with the US is simply wrong. Dollars may be excepted as payment in Argentinia but i seriously doubt that you could pay with Pesos in America.
Leaving the gold standard would also be a false comparison. The Irish pound has also its problem as that took a very long time. The latin monetary union is too long ago, franc CFA is Africa and i don’t know how Norway handled it.
The reason for leaving the Euro is also very important. If Holland would decide tommorow to leave the Euro than there would be no real problems. They could say that in 3 months the banknotes would switch and there wouldn’t be a run on the banks. But if Italy would be forced to leave than all bets are off. But i don’t see a way why a country would be forced to leave. It is not like a default on Italian debt is a problem for the other Euro countries because they can’t be forced to pay it back.
Edward, according to the Dutch central bank the Dmark was overvalued relative to the other Euro currencies so substituting Dmark for Euro is the wrong thing to do.
“Dollars may be excepted as payment in Argentinia but i seriously doubt that you could pay with Pesos in America.”
OK, this is clear, I was making an analogy. The arrangement that Argentina had with the US was a lot nearer to the arrangement that Italy has with Germany than the relation between two US states that is often used as a comparison.
I mean I think the use of euro notes for holiday purposes is really worn out as an excuse for having a common currency. The Brits still have the pound and they seem to have no difficulty coming on holiday in Spain.
Apart from black money – when did you last see a 500 euro note? ( half of euro notes in circulation in value terms are high denomination: ie for black money purposes) – the more important issue is electronic money.
Curiously the analogy with Argentina stretches further, since the experiment was guaranteed by the IMF which is ultimately funded by the US, just like Italy is indirectly guaranteed by Germany.
You could also say the US and China were wedded in an ‘unholy’ monetary union, with Greenspans liquidity push funding the property boom in Shanghai.
Really the difference between China and Argentina in this sense is that Argentina got caught on the dollar ride up, while China has ridden the dollar down. If the yuan had been pegged to the euro since 2002, you wouldn’t be hearing any complaints just now.
“It is not like a default on Italian debt is a problem for the other Euro countries because they can’t be forced to pay it back.”
No, I don’t think Italy would be forced out, I think they’ll want to leave. It will be the ability to devalue that will be the issue, and the need to burn-off the government debt with inflation, the ECB will never permit this, and I don’t think they can pay it off, not without cutting back spending so much that they provoke a massive deflationary recession.
Whoever said economics was a ‘dismal science’. I think it’s exciting, and at times hilarious. The important thing is to not make the mistake of taking money too seriously. It’s only business.
“Edward, according to the Dutch central bank the Dmark was overvalued relative to the other Euro currencies so substituting Dmark for Euro is the wrong thing to do.”
Yep, we had this in another post, about Zalm. But the point is if the Deutschmark were an independent currency, then they could steer it down from the German central bank, without forcing through all this wage deflation they have to get into at the moment.
Wage deflation is bad but wage growth below inflation is the best solution for the problem Germany is in. If the Deutschmark was independent than they could steer it down but the Deutschmark hasn’t been that independent since its inception. The overvaluation was also not that severe that it was big enough for a devaluation in the EMU era so relative wage deflation was the only real solution.
Italian debt of 140% of GDP sounds bad but it is IMHO not in the dangerzone. As state they have a captive market while the Euro makes sure that they their interest rate on their debt is very close to inflation