Monday, January 9, 2012

If only I had a dime for every time someone said "The Euro Is Dead"...

This was the cover of "The Economist" a few months ago, when concerns about the future of the euro had reached an all-time high, and the British (who of course never really liked the euro) were even talking about a British government's plan to help its citizens that have been "stranded" in in country that was part of the eurozone to get back to England!

But the euro didn't break up - not yet at least. And despite all the noise about its death (especially by the British/American media), the currency that is most in danger is...the dollar, as we've already discussed in a previous article. You see, the dollar is dying, as the world as about to reject it due to the continuous money-printing by the FED, and the euro is trying to become the "anti-dollar". After all, that was its mission when it was first launched, wasn't it?

Of course, the euro-system has many problems, and we shall discuss them in this article. So how can it become the "anti-dollar"? This is an important question, and we will try to answer it - but first we must discuss the flaws of the euro-system and remember a few things that we've previously mentioned when talking about the dollar.

The EU and the eurozone projects are proof that it is possible to have temporary agreements between capitalists and between states. However, we must never forget that in capitalism, each capitalist has to compete against the other capitalists, and each state has to compete against the other states. Europe is after all a continent that has hosted many battles between many nations, city-states, etc. for thousands of years.

In fact, the last few decades of relative "peace" are somewhat of a "paradox", as it is historically very rare for all those states to "unite" together for as long as they have, and history suggests that monetary unions in particular don't really last that long. The reasons for this "unification" were the following:

The European imperialists wanted to "counteract" the influence of the USA (and of other powerful states).

2) The stronger states (eg Germany, France) wanted a better way to exploit the weaker states.

In this article, we are not going to discuss about the EU, as we will concentrate on the euro-system of a common currency between all the member-states.

For each country to compete in the world market, they have a set of "tools" at their disposal, and one of them is monetary policy.

If for example a country's exports are not doing very well, then this country can devalue its currency, a policy that lowers the wages of the workers who are getting paid in that currency.

And if the labour costs are reduced, then the capitalists can sell the products at lower prices in the market, making them "more competitive". As the products become cheaper, more people prefer to buy them, and the country's exports start doing better.

In today's environment, all the western countries are more or less facing this problem, as they find it hard to compete against the cheaper Chinese goods. So, they all want to devalue their currencies - and they all do up to a point.

Furthermore, their economies are even worse than you think, as not only have the industrial capitalists fled to Asia, but the western nations have been "masking" this fact by using debt as a substitute, to keep their economies going. These debts cannot be repaid, so the banks that have given them out are now insolvent. So, the western nations want to "print money" and devalue their currencies not just to "screw the workers", but to "save the banks" as well (it's amazing how often these two objectives coincide).

This is the reason why the oil states are starting to reject the dollar, as they don't want to continue getting paid in a currency that is constantly being devalued. China and Russia don't like the dollar either. But what about the euro?

The theory is that currency unions work can work as long as the economies that are participating in them are “reasonably homogeneous”, i.e. they are almost "equals" in terms of how competitive they are, how much political and economic power each nation has, etc. This is known as an "optimal currency area".

Is the eurozone an optimal currency area? Obviously not. Didn't the politicians, the bankers and the corporations that are in charge know this? Of course they did (although few of them will publicly admit it - in fact, most of them will try to "play dumb"). But is suits their interests, so they did it anyway.

The eurozone was politically a creation of the Germans, and economically a creation of the bankers. It was relatively easy to get in (even Greece made it in - all it took was a little "creative accounting"), but it certainly isn't easy to get out.

Each state has different problems, in terms of debt and competitiveness. But the weaker member states have surrendered their right to devalue the currency they use. And the Germans don't want a lot of money-printing, as their economy is doing much better than the others (Germany is able to do well because labour costs are much higher than China's or India's, but the German workers are more productive and the products they produce have greater quality).

So, Germany can withstand a "strong euro", at least much more so than the rest of the eurozone members. So, they continue to do well, as their "eurozone partners" (competitors) are left to rot. This is great for the Germans, as they are become more and more dominant over them.

Everyone else is at their mercy, and the Germans are taking full advantage of this, as they ask for more and more "concessions" in exchange for devaluing the euro (it is obvious that they are pretty much in control of the ECB, as they are -by far- the strongest nation). Spiegel even went so far as to admit that Greece "has become little more than an EU protectorate" two years ago, and Germany is now on its way to do the same in Ireland, Italy and who knows where else. So, the Germans are quite happy to keep destroying the other nations economies - here's a German banker's response when asked about the implications of Germany's policy of not printing as much money as the others:

ECB Weidmann:Italy Can Cope W/Bond Yields Over 7% For A While
European Central Bank Governing Council member Jens Weidmann expects that Italy will be able to cope with interest rates on its government bonds of above 7% for a while.
In other words, let them suffer a bit longer, they can take it - and after all this suffering, they will have become even more desperate, so they'll agree to anything - even becoming a protectorate. This is also the reason why the Germans reject policies like the eurobond, because that would "share the burden" between Germany and the weaker countries. Why "share the burden", when you can dominate?

Furthermore, from a historical perspective, Germany experienced hyperinflation during the 1920's, and so they aren't very comfortable with this whole idea of "printing money out of thin air". But that's obviously not the only reason for their behaviour:

If there was no euro, the other countries would have been able to devalue their currencies and do a little better - so they wouldn't have to become "little more than EU protectorates". As for Germany, they would actually do worse, because their economy is doing well, so the Deutsch mark would rise, and that would make Germany's exports less competitive. But now, within the eurozone, Germany gets a slightly devalued currency (thanks to the PIIGS and some other state who are keeping it down), while the other nations get a revalued currency, which only worsens their competitiveness, and pushes them further into debt, as they "must" borrow money in order to "compensate" for their growing trade deficits (by the way, this is the reason why their bond yields are exploding higher, as the investors don't really believe that these nations can repay all these loans, especially when their productive base is being destroyed).

The best solution for these nations is to officially declare bankruptcy, but of course that would be a huge blow for the bankers, as they can't "absorb" all these losses (at least not now). So, no government is willing to do that until they've given enough "bailout packages" to the banks in order to keep them from going bankrupt when the weaker nations start defaulting on their debts.

Moreover, the austerity measures that are being implemented have the support of the big industrial capitalists of each country, as they reduce their labour costs, and eliminate some of their smaller competitors.

But what about the banks? Aren't they being bailed out? Sure they are. The ECB IS printing money. The Germans are delaying this process as much as they can, in order to make the others desperate/willing to accept their conditions. And they are trying to print as little as possible. But, after all, even the German banks are in trouble, so they have to choice but to print (a lot of) money and bail them out. Here's The Economist on the subject:

Is this really the end?
Unless Germany and the ECB move quickly, the single currency’s collapse is looming

Investors’ growing fears of a euro break-up have fed a run from the assets of weaker economies, a stampede that even strong actions by their governments cannot seem to stop. The latest example is Spain. Despite a sweeping election victory on November 20th for the People’s Party, committed to reform and austerity, the country’s borrowing costs have surged again. The government has just had to pay a 5.1% yield on three-month paper, more than twice as much as a month ago. Yields on ten-year bonds are above 6.5%. Italy’s new technocratic government under Mario Monti has not seen any relief either: ten-year yields remain well above 6%. Belgian and French borrowing costs are rising.

Add the ever greater fiscal austerity being imposed across Europe and a collapse in business and consumer confidence, and there is little doubt that the euro zone will see a deep recession in 2012—with a fall in output of perhaps as much as 2%. That will lead to a vicious feedback loop in which recession widens budget deficits, swells government debts and feeds popular opposition to austerity and reform. Fear of the consequences will then drive investors even faster towards the exits.
Can anything be done to avert disaster? The answer is still yes, but the scale of action needed is growing even as the time to act is running out. The only institution that can provide immediate relief is the ECB. As the lender of last resort, it must do more to save the banks by offering unlimited liquidity for longer duration against a broader range of collateral.
It is interesting to note however that the Germans are even "playing chicken" against the Americans, as the American banks would also be in trouble if Europe falls. So, by not printing enough money, the Germans are forcing the USA to print dollars in order to bail out European banks as well (via financing the IMF - the USA is the IMF's main creditor).

As for the people, they are starting to reject the euro (there is a rise of Euroscepticism in all countries, including Germany):

- The German people don't want to bail out "the lazy Greeks" (in reality of course, they are bailing out the bankers, including the German bankers, but it is so much more convenient for the elites to accuse all the Greeks of being lazy, and a lot of people buy into this sort of propagnada)

- The people of the other countries don't like the austerity measures, the endless bank bailouts, etc.

But the elites like the euro - especially the bankers. This is why they will try to keep it, even when -in the worst possible scenario- some countries fail or even if a two-tier euro-system is implemented, so that the weaken countries can use a weaker currency and not go into full-scale revolt (note: There is some talk of this two-tier euro, with the Euro of the North consisting of Germany, Holland, Finland, etc, and the Euro of the South consisting of the PIIGS, and possibly France).

But why do the bankers like the euro so much?

Click to enlarge - this table shows the world official gold holdings, and as you can see the combined gold holdings of all the eurozone countries rank as #1 on that list. The euro is the "least bad" major currency of the world, as it offers more gold backup that the dollar (which is its main rival).

Yes, I know what some of you might say? The world has been off the gold standard for years. And yet the banks keep hoarding gold, don't they?

And as the dollar's reign as the world's reserve currency is coming to an end, as we've discussed, the euro is the least bad option (apart from gold of course, which is already "making a comeback" in the hearts and minds of people as the world "truest" form of money).

For those of you who haven't read our article on the subject, here's the gist:

As the dollar -and the rest of the fiat currencies- are losing their value due to money printing, we are approaching a point where the world will simply reject them, and the West will not be able to have oil - at least not at "reasonable" prices by today's standards. We got a taste of that when Nixon first abolished the gold standard - the oil states demanded to be paid in gold instead of (inflated) dollars for their oil - thus the "oil crisis" of 1973.

This is why the USA "must" attack all the oil states who try to break free from the dollar, and start accepting other means of payment - because no mater how much it costs them to go to war, it will cost them a lot more if the world finally gets of the "dollar standard", and the value of the dollar goes to almost zero.

The main thing that prevents the oil states from rejecting the dollar right now is their fear of being attacked by the USA - if that fear goes away, then they will be free to choose what currency to accept as means of payment.

But, in the end,it is only a matter of time before the world "moves away" from the dollar. China, Russia, Iran, and even Japan have already signed various treaties, stating that they will use their own currencies instead of the dollar when they trade with each other.

When this happens, "gold will be king" - and the euro will be the least bad currency, as it has the most gold backing. This is why China is supportive of the euro, and of course Russia has great ties with Germany (Germany gets over 50% of its energy from Russia - we will talk more about how Germany is forming an alliance with Russia and China in a future post, as this is obviously an alliance that will upset the balance of power in the world).

The Euro-system even has a mark to market valuation of its gold - so when for example the euro falls, the gold holdings of the euro-system increase in value (and vice versa). The dollar system does not do that - the USA never change the exchage rate of their official gold holdings. In fact, they still value them at 35$/ounce, which was the original exchange rate between the dollar and gold that was set during the Bretton Woods agreement. In a nutshell, they don't want to officially accept that the dollar has lost almost all of its value since then.

The euro-system however can handle the end of the current dollar-centric monetary system. Not that it will do well, but will do "less bad" than the others. So, even if it destroys the lives of many people, even if entire European States fail, the elites like the euro-system, and they will fight to keep it running.