Monday, 23 July 2018

Waterloo... just a suburb of Brussels

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  • Peters 475px June 2014

Is the single currency on the way to meeting a terminal comeuppance?

THE BATTLE AT Waterloo, which lies on the southern fringes of Brussels, took place 200 years ago on June 18. Napoleon Bonaparte was defeated by a rag-tag coalition army under Arthur Wellesley, 1st Duke of Wellington. Ever since then, “meeting one’s Waterloo” has become a stock line in the English language for anybody suffering their terminal comeuppance.

Greece – I’m afraid we’re back to that again – met something this week that could either be its Waterloo or, for students of Hellenic history, perhaps its Thermopylae.

On the foreign exchange markets so far there has been what could at worst be called a muted response to events. The softening of the currency on the back of the ECB’s aggressive quantitative easing programme ended in March when the euro traded at US$1.05 on the way to what looked like an inevitable break through parity. Instead of that, and while the Greek crisis deepened and deepened, it rallied back to a range of between US$1.10 and US$1.15 where it has remained stuck, with one short excursion lower, since early May.

THERE ARE MANY out there now who see the euro as not much more than a large fixed exchange rate area. When thought about properly, it never really rose to being anything better than that. The lack of fiscal union has been bugging the euro since its inception, but we all somehow bought into the currency myth and that was (for a time) good enough. Let’s face it, the value of anything is what buyers are prepared to pay for it and if buyers (and users) of the euro are prepared to imbue it with magical qualities as they have done, so what?

I suppose there has to be some truth in the classic observation that if it walks like a duck and quacks like a duck, then it must be a duck. The euro has all the trappings of a currency – from a central bank of its own all the way down to notes and coins – even though there is “local” coinage – with all stations in between. And yet it could not be further from the other major currencies which dominate global trade. The euro is a fixed exchange rate mechanism parading as a currency.

The problem with the euro is that it was yet another of those many European vanity projects that were created with flaws. However, instead of working to address some of the fundamental problems – the absent fiscal union being the most important one – the powers that be have set out to surround the currency with a bulwark of structures aimed first at hiding the blemishes and second at preventing them from immediately surfacing again. The likes of the ESM and the EFSF are not here to fight the causes but to suppress the symptoms.

People with addictive tendencies – and those around them – know that their problems cannot be addressed until they exit the state of denial and acknowledge their problem. In the same way, until the masters of the euro find the courage to confess to its congenital flaws, it will remain troubled.

The euro is a fixed exchange rate mechanism parading as a currency

ON THE OTHER hand, the definition of a fiat currency has embedded in it somewhere the simple acknowledgement that its value and acceptability rests on trust and that, as long as a critical mass of users don’t fear that if they find themselves being paid in euros that they will wake up one morning holding worthless scrip, nothing too much can go wrong. Why then, do we attach such value to the currency we use?

Greece and its warped relationship with the euro has nothing to do with feeding its people and defending its borders but has become a matter of national pride.

The bitcoin, in as much as it circulates, has to some extent proven that as long as there is agreement to use a measure, any measure, as a basis for exchange, no central banks and stability funds might be needed and that they might in fact be legacy institutions of a pre-internet age.

Not that I would want to find myself accused of suggesting that rather than going back to the drachma, Greece try its hand in using the bitcoin, even though there has to be something to be said for Athens to try a Great Leap Forward rather than a regressive move back. (Incidentally, I wonder whether Greeks can still freely trade in bitcoin via the internet.)

The eurozone’s travails with Greece have raised many questions about the future, if not the very existence of the single currency project. A number of lucid thinkers agree that even at its heart it isn’t necessarily a problem of Greece being too weak but one of Germany being too strong for the unitary currency not to eventually be torn asunder. In order to remain a viable and credible currency, the euro cannot afford to get it right 90% or even 95% of the time. To be real and credible, it has to get it right 100% of the time and it has to date failed to achieve that.

One of the many crisis meetings of recent weeks took place in Brussels. It wasn’t at Waterloo. But enthusiasts for the euro might consider that Waterloo isn’t exactly far away.

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