Many readers have been asking about the mechanics of any hypothetical ‘euro’ break-up, or indeed of what might happen if one country were to leave. Up to now, we have been told this is impossible, but clearly it is possible, and, however remote the possibility may seem (the order of 5% risk is the topical response) institutions in the financial sector cannot be without a plan ‘b’. In this context, this article, I found whilst idly noodling around the net, could be seen as informative. It is written by a software engineer for a magazine called Software Reality. The article’s title: reverse-engineering the euro.
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Author Archives: Edward Hugh
That Other Issue
The euro. Hamish McRae talks a lot of sense in the Independent today:
“So was the euro a terrible mistake? Will Germany, Italy and France go back to the mark, the lira and the franc? A string of stories have hit the streets hinting that this may be the outcome following the failure of France and the Netherlands to ratify the European constitution.
It is easy to see why there should be such speculation, but the eurozone is not going to collapse in the near future. I may be wrong, but my instinct is that while it will eventually unravel, such an event is almost certainly at least a decade away. That said, the debate matters because what was once a no-go subject is now being talked about, and this changes things.”
Let Battle Be Joined
Well, things are shaping up nicely for a ‘healthy debate of the underlying issues’ on 16/17 June. Chirac and Schr?der have pronounced: the ratification process must continue, Jean-Claude Juncker is warning that failure to reach a budget deal at the summit would “turn the big European difficulties into a big European crisis“, and Peter Mandelson forsees a historic opportunity for Tony Blair. Mandelson is quoted as saying:
“Tony Blair could carry on for another three years now that he has been given a “fresh calling” to resolve Europe’s crisis, his old ally Peter Mandelson claimed last night.
Mr Mandelson said the French and Dutch rejection of the European Union constitution handed Mr Blair another chance to secure his legacy as Prime Minister“.
What does all this mean? Well, according to France’s Le Figaro:
“Si Londres gagne, c’est la victoire de l’Europe lib?rale, ? l’anglo-saxonne, aussi ?largie que possible, un grand march? contr?l? au strict minimum par Bruxelles. Si Berlin l’emporte, c’est la victoire de l’Europe politique, libre-?changiste, mais surtout f?d?rale, avec une d?fense, une diplomatie, et une monnaie commune. Dans l’Europe b?tarde du trait? de Nice, tous les Etats membres n’ont pas encore choisi leur camp. La crise va les obliger ? tomber les masques.”
“”If London wins [the ratification dispute] it is a victory for liberal, Anglo-Saxon Europe, enlarged as much as possible, a giant market, with regulation from Brussels kept to a strict minimum. If It is Berlin that carries the day, it’s victory for the Political vision of Europe, free-trade, but especially federal, with a common defence, diplomacy, and a common money. In the ‘bastard’ Europe born of Nice treaty, all members states have not yet chosen their camp. The crisis will force everyone to take off their masks.”
Of course there is a third party here: the Commission. What Barroso will undoubtedly be working for is a pragmatic, workable compromise.
“Mr Barroso urged the French leader and his colleagues to “turn a crisis into an opportunity” and argued: “It is vital that we use the present moment to forge a new consensus.”
He warned Europe not to indulge in a “blame game” or an “ideological rift” between supporters of free markets and those who believe in government intervention. What was needed, Mr Barroso said, was “an intelligent synthesis between the market and the state, which can help Europe win and not lose in the face of globalisation”.”
‘Euro Overvalued’
The euro is apparently overvalued. Actually I happen to agree, but today this opion comes to us from a most surprising person: Luxembourg Prime Minister Jean-Claude Juncker, at this point in time President of the European Union. Now I am surprised by this, since he is neither Economics commisioner, nor spokesperson for the ECB, so I am not clear why it is he feels himself compelled to express an opinion.
Really this just highlights the fact that the institutional labyrinth we have created is such that not even those who administer it have sufficient clarity about who is responsible for what. In theory his press conference was about the forthcoming budget negotiations, but judging by what he said, I’m not clear he got round to reading that memo from Barroso about maintaining a sense of calm.
Luxembourg Prime Minister Jean-Claude Juncker, who holds the European Union presidency, warned on Friday that failure to agree on a new long-term EU budget this month would turn a political problem into a full-blown crisis.
Juncker, who also chairs euro zone finance ministers, said the single currency shared by 12 EU countries had been weakened by the “No” votes to the European constitution in France and the Netherlands but was still overvalued compared to the dollar.
“A failure on the financial perspective (budget) would turn the big European difficulties (after the referendums) into a big European crisis,” he told a news conference.
“As a result of the referendums, the euro is weakened. What helps the economy for the moment could in the long term become a burden,” he said, adding: “I think the euro is overvalued in relation to the dollar.”
He also informed the press that he would resign as PM if, as expected, the Luxembourg referendum voted ‘no’ on July 10. Anybody seen an actual Luxembourg poll recently?
Denmark Poll: ‘No’ Takes Lead
The EU observer is carrying details of a poll conducted in Denmark by Greens Analyseinstitut, and published in the Danish business daily B?rsen today (3 June), 39.5 per cent of Danes would reject the Constitution, 30.8 per cent would now approve the Constitution, while 29.7 per cent were undecided.
Calculating roughly, this means of those who have decided, 56% are against and 44% are in favour. Interestingly 63% want the right to vote. Prime Minister Anders Fogh Rasmussen – the EU Observer says – is reluctant to officially cancel the planned referendum scheduled for 27 September. This is an elemnt I hadn’t bargained on – the people demanding the right to express themselves. This could become a bandwagon which it gets difficult to stop. I guess it is what Barroso meant by ‘contagion’.
Maroni Update
Here’s the FT’s reading of the situation.
Note this extract: “As financial markets digested the remarks of Roberto Maroni, Italy’s welfare minister, the interest rate differential between Italian and German bonds rose to 23 basis points, the widest spread since November 2002.”
These are the numbers we will be following at Afoe moving forward. Maroni is a member of a Northern xenophobic party that wants an independent country for the north of Italy. But *note*: he is in the government, and responsible for an important part of the Lisbon agenda, labour reform. So this is not some complete outside crank. Bottom line: Berlusconi’s government is an unstable coalation, and this very instability *is* cause for concern, especially since we have just seen mainstream politicians lose important votes in two of Europe’s more stable democracies.
One more irrelevant detail:
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Italian Referendum Call
But in this case the vote would be about Italy’s continuing membership of the euro-zone, rather than the EU constitution. Now before going any further, I feel the need to advise extreme caution in the face of such developments.
In the first place the call comes from the Italian Labor Minister – and member of the separatist Liga Del Norte – Robert Maroni: It was made in an interview published by the Italian newspaper La Repubblica. He was not making a statement on behalf of the government, he was in all probability ‘electioneering’. (See Fran’s post: those politicians).
On the other hand, Berlusconi is pretty vulnerable at the moment, remember he has just put together a new coalition, and elections are coming next year.
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Your Next Car ‘Made in China’?
China is getting into car manufacture in a big way, but before going further with this, let me sidetrack you to another article in today’s FT. Here you will find two interesting details. Firstly, according to Arthur Kroeber, of China Economic Quarterly, ?Since 2003, China has gone from being a net importer of capital goods to being a net exporter”. I’m still loking for some confirmation of this, but if true, it is very significant. The other detail: overcapacity means there is a continuing price war in China, and factory gate prices are falling. This point needs to be borne in mind by all those who imagine a rise in the value of the Renminbi would produce a comparative increase in ‘mark to market’ prices for consumers. I’m with Morgan Stanley’s Andy Xie here, overcapacity is likely to be such that the ‘pass through’ rate would be minimal, most of the on-costs being absorbed by an ever more deflationary environment in China.
Interestingly enough, Jean Claude Trichet gave three arguments, at the end of his press conference yesterday, in order to justify the urgent necessity for the Lisbon Agenda: ageing, technological changes, and growing global competition (or labour arbitrage in Stephen Roach’s language). I couldn’t agree more.
Now for the cars. Yale Global has reproduced an interesantissimo supplement from the FT:
Automakers may see China as a growing market, but soon they may face unexpected competition from a number of manufacturers who are seeking to export to the West, as well. Several Chinese companies have already begun a trial run in the Middle East to prepare for the US market, the goal of more than two decades of attempts to build a competitive car industry. The Chinese companies will encounter numerous obstacles and opponents ? including the multinational companies that currently dominate the global markets ? but if successful, they could reshape the auto industry. Because the economies of countries like the US and Germany depend heavily on the auto industry, the implications of such a move are substantial. How will the West respond?
Some Good News
For once, small but good:
Growth in European service industries, which account for about one-third of the euro-region economy, unexpectedly accelerated in May to the fastest pace in seven months.
An index based on a survey of about 2,000 purchasing managers of companies including airlines and banks compiled by NTC Research Ltd. for Reuters Group Plc rose to 53.5 from 52.8 in April. The median forecast by 27 economists surveyed by Bloomberg News was for a decline to 52.5. A reading above 50 indicates expansion.
When No Means Maybe
Sometimes, just sometimes, being a journalist is hard. War correspondants, political columnists pressured to ‘firm-up’ an elusive source‘, BBC reporters, the list of those who could rightly complain is probably endless. But amongst the most challanging of the many missions which may occasion their way into the in-tray must, undoubtedly, be that of interpreting the intentionally elusive language of the central banker. Yesterday was there was a good case in point. ECB President Trichet actually said:
?I am not telling you anything that could be interpreted as preparing a rate cut,?
Now buried deep within the lexicon of obscurantism which governs central bank policy interpretation must be one which reads: when they say ‘a’ they mean ‘b’, since today we find this: Trichet signals ECB could cut rates
So, just to help you out, I’ll explain how this particular journalist probably reached this particular reading: by a process called backward reading. The FT’s Ralph Atkins must be convinced, just as I am, that the ECB will be forced (by both political pressure and by economic realities) to cut rates later in the year. So reading backwards, Trichet, who must himself be aware that the arguments for a rate cut may become compelling, was, of course, preparing the ground. What he couldn’t do yesterday, not under any circumstances,was give any indication whatsoever that he was ceding to the impact of the recent votes. Strange world, that of the banker, and that of the journalist come to think of it.