Posts Tagged ‘Euro’

A “no” in the Italian referendum would be the beginning of the end of the Euro

November 18, 2016

The Italian referendum on 4th December is actually about the constitution. The intention with a yes vote would be to reduce the size and limit the power of the upper house to make it easier for governments to govern. But it is indirectly also a referendum on the Euro. While a “yes” vote would allow Matteo Renzi to continue as Prime Minister, and though it will be a great relief for the Eurocrats, it would be far from a ratification or an approval of the EU or the Euro. A “no” vote on the other hand would be a Brexit-like, hammer blow to the Euro and to the misguided concept of a Holy European Empire. I suspect it would be the beginning of the end of the Euro.

The Spectator:

Though he is a big fan of the European Union, Barack Obama brings bad karma to it. …… His farewell visit is, if not a kiss of death, surely a bad omen for the EU and most immediately for one of those present in Berlin to bid him goodbye: Italy’s prime minister, Matteo Renzi, who has called an all–important referendum on constitutional reform for 4 December. If he loses, as looks ever more likely, it could cause a run on Italy’s sclerotic banks that could engulf the eurozone. ….

….. In essence, Renzi wants to curtail the powers of the upper house, the senate, and to cut the number of senators — who would no longer be elected, but appointed by regional governments — from 315 to 100. If he succeeds, his economic reforms should be easier to pass. ……… 

Grillo has dismissed the referendum question as ‘incomprensibile’. His movement and most of what remains of media tycoon Berlusconi’s party, Forza Italia, will vote ‘no’ in the referendum. So too will the right-wing populist Northern League party, which also wants Italy out of the euro and illegal immigrants out of Italy. On top of that will be a significant tranche of Renzi’s own party.

So this has become a referendum not just on constitutional reform but on Renzi — and if not on Italian membership of the EU, certainly on the euro. The Brexit vote, the triumph of Trump and the populist spring tide sweeping Europe are sure to convince many Italians to vote against Renzi.

The connection between a constitutional question (almost imcomprehensibly phrased) and the Euro is obscure but real.

Italy: Performance in the Eurozone (graphic via Forbes)

Italy: Performance in the Eurozone (graphic via Forbes)

ForbesKnow this: The European Monetary Union does not work very well, if at all, without Italy. A “no” vote would be the death knell of the euro. …….

……… If he loses, Renzi has promised to step down—a pledge that has turned the referendum into a popular vote of confidence in the unelected prime minister, his Europhile policies, and—by extension—Italy’s membership of the eurozone itself. As a result, a “no” vote in October will not just precipitate the fall of Renzi’s government; it could throw Italy’s long-term membership of the eurozone into doubt, plunging the single currency area once again into crisis. 

Italy’s fundamental problem is that it’s stuck in a policy no man’s land. Its old economic model, in place for much of the last three decades of the 20th century, relied on a combination of currency devaluation to maintain international competitiveness together with fiscal spending to support the poorer regions of the country’s south.

Signing up to the euro put an end to all that, preventing devaluations and prohibiting budget deficits at 10% of gross domestic product. However, the design of Italy’s bicameral parliamentary system, in which the upper and lower house—the Senate and the Chamber of Deputies—wield equal legislative power, made it almost impossible for any government to push through the structural reforms necessary for Italy to compete and prosper within the eurozone. The result has not just been depressed growth and relative impoverishment, but an outright decline in living standards as Italy’s real GDP per capita has slumped to a 20-year low.

Such a below-par economic performance has led to a build-up of bad assets on the balance sheets of Italy’s banks, where 18% of all loans are now classed as non-performing. In turn, this bad loan overhang has eroded the ability of the banking sector to extend new credit to the thousands of small businesses which are the engine of Italy’s economy and which normally power employment growth. The result is stagnation. ……..

………. All this means that the possibility of a “No” vote in Italy’s constitutional referendum ……. is the biggest clear and present danger to the euro’s survival. …… the only economic choice for Italy would be between continued stagnation, or a return to the old economic model of successive devaluations. The latter course would naturally mean exiting the eurozone anyway. ……..

…….. If Renzi wins ……. the eurozone has fresh hope. But if he fails, Italy fails—and very likely the eurozone fails too.


Neither in or out, but a temporary Grexit is now on the table

July 12, 2015

As always in the EU or in the Eurozone countries, differences of opinion end up with wishy-washy compromises which only maximise the level of dissatisfaction. The EU has become expert at choosing the least attractive solutions in its quest for divine consensus.

After 5 years of trying to keep Greece from leaving the Euro, Germany has finally put forward the compromise position of a 5 year time-out from the Euro, a temporary Grexit which, in all likelihood, would become permanent if it is adopted. The time-out would be offered to Greece if they do not manage to pass some emergency resolutions through their parliament by Wednesday. But the matter of greatest significance, which highlights the fundamentally flawed nature of the Euro, is that a Grexit – even just a temporary one – is for the first time formally acknowledge by the Eurozone countries as being on the table.

It will be painful in the short term but the best for Greece is to leave the Euro, stay in the EU and build up a strong New Drachma. I hope they do take a time-out, that their debt is then restructured, that they get help to and do get back on to their feet and eventually that they make the time-out a permanent exit. And that then leads to an orderly dismantling of the Euro – or at least a suspension of the Euro – to be revisited again when political union is achieved – if ever.

A currency union has to be the natural consequence of a political union and cannot be used to coerce politically unequal nations into a phoney political union that their populations do not want.

For whom the Euro tolls

July 7, 2015

Without political and fiscal union coming first, currency unions do not work.

In fact currency unions place a rigid constraint on freedom of action in the political and fiscal arenas. History has far more examples of failed currency unions than of any successful ones and – nearly always – the successful ones are because political and fiscal union has come first. The UK, USA, Federal Germany and the USSR are (or were) firstly political and fiscal unions which allowed for a successful common currency. Currency union is not a tool which enables political and fiscal union. It is political and fiscal union which allows currency union.

It is the believers in the Holy European Empire (in Bonn, Paris and Brussels) who think they can use the Euro to force the union.

The failed examples range from the

  1. New England colonies who each printed their own money but which was acceptable at par in all 4 states till other colonies outside the union started printing the money as well. Massachusetts withdrew and introduced a silver standard. (???? – 1750)
  2.  The Latin Monetary Union which was a French inspired ego-project based on a silver/gold standard and joined by Belgium and Switzerland. It was later joined by Italy, Greece and Bulgaria. But it could not cope with fraud with silver content coins as the gold standard was introduced in other countries since it had a fixed exchange rate between gold and silver (15:1). It was formally founded in 1865 and came to an end with WW1 but officially only in 1926.
  3. The Scandinavian Monetary Union started in 1873 but became dormant in 1905 and came to an end officially in 1924. It worked for a while but could not withstand the variation of inflation in the different countries which led to a string of devaluations and dumping gold in the open market and rebuying it at much lower fixed rates from the unofficial Central bank.
  4. The East African shilling bringing Kenya, Uganda and Tanganyika (and later Zanzibar) started in 1922 pegged to Sterling. It survived independence of these British colonies but could not withstand the depreciation of the British Pound when the Sterling Area collapsed in 1972.
  5. The CFA (African Franc) was started in 1945 in the French colonies of West and Central Africa and is still in use. It was pegged to the French Franc and  is now pegged to the Euro. Even if it may have contributed to currency stability it is one of the key reasons why economic planning for the very diverse developing countries of Central and West-Africa has become impossible.

There are many other examples, but the simple conclusion is that without political and fiscal union already existing, a currency union is not a way of imposing such political or fiscal union. If there is diversity among the countries involved and if fiscal and political measures need to be different in different regions, then currency union is far too rigid and can only promote political dissatisfaction and populist revolt.

And so it is with the current Eurozone. There is no political or fiscal union and currency union is being used (by some) as a tool for trying to impose a political union. The countries of the Eurozone are far too diverse politically and fiscally to be forced into a common shape by a common currency. The Eurozone is wishful thinking. When Marxists in Greece want to try their experiments it cannot possibly be reconciled with capitalist regimes elsewhere.

Any country which needs to exercise political and fiscal freedom cannot – actually must not – subject itself to the strait-jacket of a currency union. Greece should never have joined – or been allowed to join – the Eurozone. Cyprus should never have been allowed to join either. Currently, of the Eurozone countries, Finland, Latvia, Lithuania, Malta, Portugal, Slovakia, and Spain would be better off without the political and fiscal constraints that is set by the Euro. Kosovo and Montenegro have adopted the Euro voluntarily but they are not constrained in quite the same way.

As far as Greece is concerned I hope they leave the Euro (and remain in the EU for now) and so kick-start the process of bringing the grandiose, but untimely, Euro experiment to an end.

Cameron is the unlikely winner of the Greek referendum

July 6, 2015

There will be millions of words written about the Greek “No” to the conditions set by its international creditors and what it means. But what strikes me is that the only real winner is David Cameron.

For Greece and the EU it is a lose-lose situation. If the creditors soften their conditions, the Euro and the EU loses. If the creditors stand firm and Greece leaves the Euro, the sanctity of the Euro and membership of the Eurozone is gone forever. My view remains that the best for Greece and the EU is for a return to the drachma, an EU which shrinks its ambitions and a dissolution of the Euro.

If the creditors now soften their conditions and a Grexit from the Eurozone is avoided, it will demonstrate that the IMF, ECB and EU conditions will never be the final word again for any member country. Each will always have the option in any negotiation of calling a “referendum” to reject the terms. Any negotiation by a member country with the EU can use a referendum to finally reject an EU position. Any country can then reserve the right to put any EU Directive to a referendum and EU Directives will become merely guidelines to be accepted or rejected by member countries at will.

If, on the other hand, a Grexit does occur and the fatally flawed Euro experiment begins to come to an end, it will be emphatic evidence also that the entire concept of a new Holy European Empire is something only in the minds of a very few in Bonn and Paris and Brussels, but is not shared – at this time – by the general population (represented by the general Greek public). It is a concept either too far ahead of its time or possibly which will never be real. At any rate, for this time, it would demonstrate that it is fundamentally flawed.

And what strikes me is that this helps David Cameron both within the EU in his quest for renegotiation and even for treaty change. It even helps him domestically. He has had an issue of credibility in that he has called for an In/Out referendum where he will surely have to call for an “In” vote. His problem lies in being able to show that he has won enough during negotiations to justify an “In” recommendation. But now, with the Greek precedent, he can even demand the most drastic changes in Europe without being thrown out of any room. He is likely to get changes which were unthinkable yesterday. He can even go to a referendum ostensibly demanding an “Out” as a negotiating ploy, get an “Out” vote and then return to the negotiating table. He can call a second or even a third referendum (and if a bankrupt Greece can carry out a referendum within a week then surely the UK can manage something similar).

Referenda are now just a step in the EU negotiating process.

Scotland vote is devolving into “yes” for a pink €

August 24, 2014

I am trying from a distance to follow the arguments being aired in Scotland about the joys and sorrows to be expected from a “yes” or a “no” vote in the referendum on independence to be held on 18th September.

Most of the discussions / debates I have heard have just been so much hot air (shades of grey being presented as black or white). The only issue that I have found to be of any real relevance is whether Scotland really wants to become a Euro country or not. If Scotland votes “yes”, it will have to reapply to become a member of the European Union and while that membership will not be delayed too long, an independent Scottish pound will be swamped and Scotland will probably have little chance to avoid entering the European Monetary Union and adopting the €.

Though Alex Salmond seems to be saying that Scotland can continue with the £, that is just wishful thinking and is not within his control. He may still call it the Scots Pound and he could peg it either to the the £ or to the US$. But then it will probably become a target for currency speculation and there will not be enough weight in the Scottish economy to withstand such speculation. As fracking grows in the UK and the North Sea reserves shrink it can only get worse. For a small economy forced to join the €, there are – I think – more disadvantages than there are advantages. And for small countries dependent primarily upon tourism it is worst. Larger economies with large exports have the greatest benefit.

In any event, the Scottish referendum will effectively decide whether it will remain a Sterling country or will join the Euro. And if they decide to join the Euro, they may not have a completely Red Euro but it could well be pink.

Pink Scots Euro

Pink Scots Euro

Red Euro, Blue Euro

April 5, 2013

The two-€ Europe is effectively here and it is advisable to keep any savings far away from the Red Euro zone:

Spreading Red Euro

Spreading Red Euro

Cyprus could be the straw that breaks the Euro’s back

March 26, 2013

The wunderkind of the EU have just established a two-currency Europe and have undermined the trust any depositor can have in a Eurozone bank. The Cyprus solution has effectively created a Cypriot Euro which is – in practice – worth a lot less than a normal Euro. And every depositor holding more than €100,000 will be taking a very large risk if he puts his money in a weak Eurozone bank or in a weak Eurozone country. The depositor will need to demand a risk premium to cover the risk that his money could be stolen by the bank or by the State.

A Cypriot Euro (Κ€) is now worth less than a “normal” Euro (€). What that value is is a little difficult to judge but it lies somewhere between 60% and 90% of a normal Euro. All K€ which are outside of the deposit guarantee are now only worth 80% of a normal €. Moreover currency restrictions apply which are not so different to exchange control regulations for movement outside the country but which apply – in addition – to movement of money within Cyprus. A K€ still has the same buying power as a normal Euro but, on the other hand, it will no longer be possible to get any “outside Euros” to move into Cyprus and risk confiscation!

Jeroen Dijsselbloem, the Dutch chairman of the Eurozone announced (rather idiotically) yesterday that the Cyprus solution was the template to be used in the future.  Cyprus itself does not have an economy large enought to be so significant. But effectively  he was confirming that “Savings accounts in Spain, Italy and other European countries will be raided if needed to preserve Europe’s single currency by propping up failing banks”. But the resulting, ostensibly “single currency” will , de facto, have to distinguish between the currency held in different countries and just calling it a “single” currency will not hide the reality.  Mr. Dijsselbloem later tried to back-pedal on his statement but the truth was out by then. No amount of denials will change the fact that the Cyprus solution now sets the precedent and every weak bank will now be required to try and protect its shareholders by attacking its depositors.

I think the damage has been done and it is already too late for the EU to try and soften the message. I heard today that financial advisers in India and China were already suggesting to clients with Euro holdings to make sure it was in a strong country. This eliminates Greece, Italy, Spain, Ireland and even Hollande’s France. This only leaves Germany. The Russians are probably already shifting their legitimate Euro funds to Germany or the Netherlands and their not-so-legitimate money to the Bahamas or Mauritius or the Seychelles. In the short term Germany is the main beneficiary. Not only are their exports being helped by a weak Euro (kept weak because of the weak countries persisting within the Euro) but their banks are likely to see Euro deposits from the weak countries moving their way. But in the long term a flight from the Euro will not help anyone in Europe. The ideological – and almost dogmatic – attachment to the single Euro is now damaging all of Europe and delaying the recovery. Every single one of the bailed-out countries would recover faster if only they had a currency which could have been devalued.

The Cyprus solution is also a more general attack on Europe’s middle class (admittedly the richer part of the middle class). The population of the EU is about 500 million. With an average of about 2.5 individuals per household this represents about 200 million households. Probably 15-20 million households have a net worth exceeding  €200,000 which implies financial assets (as opposed to property and other non-liquid assets) of about €100,000. So an attack on European deposits of greater than €100,000 could affect some 40 – 50 million individuals.

Cyprus could be the straw that breaks the Euro’s back.

“Single currency needs a single government” and a single European government would be a monster

May 9, 2012

Finally, David Cameron actually voiced what all politicians in Europe know but will not voice publicly. And they will not voice it publicly because a single European Government – in the current state of European politics – would be a many-headed monster – of bureaucracy, of over-represented fanatic fringes, of minority oppression, of waste, of scams and inefficiency.


A successful euro zone requires a single government if it is to work properly, British Prime Minister David Cameron said in a newspaper interview on Wednesday.

“There’s nowhere in the world that has a single currency without having more of a single government,” Cameron told Britain’s Daily Mail.


More turmoil awaits Europe as Sarkozy loses and Greeks vote against Europe

May 6, 2012

Sarkozy has lost in France according to Belgian and Swiss sources though the exit polls in France are not yet out. Hollande is expected to win by 5%.

The exit polls are also out in Greece.

In Greece, the only two parties supporting the Eurozone bailout and the austerity measures – PASOK and New Democracy – will probably not be able to form the next government. And that means that the chances of Europe leaving the Euro are greatly enhanced. In the short term this will cause massive turbulence in the Eurozone.


Sarkozy attacks Cameron – much to Cameron’s delight

October 24, 2011

While European leaders are struggling to put together a rescue package for Greece which will not have a domino effect for Italy and Spain or drown too many European banks, David Cameron is facing renewed opposition to membership in the EU from within his own party. But it is not only in the UK that opposition to the growing exercise of powers by Brussels is increasing. Almost every EU member which has not adopted the Euro (Sweden, Denmark, Norway and the UK along with some of the newer members) has rising voices calling for the limitation of European power and a return of powers to the country parliaments. Voices against the Euro can even be heard in Germany where there is a widespread feeling ( not entirely wrong) that German taxpayers are paying twice for the spendthrift ways of Southern Europe; first directly by subsiding these countries and secondly by the devaluation of their savings in Euro. The Swiss are just thankful that they were never a part of this experiment.

In hindsight, what has become obvious is that the Euro-zone has few built in sanctions to prevent the profligacy of some countries which has to be paid for by others. What is also becoming clear is that without a fiscal uniformity – which would seem like being taxed from Brussels – the possibility of  “bad” members being spendthrift will always remain.

France has always seen the Euro as part of a long-term move towards a European political and fiscal uniformity in which France would be the centre of political power. A return to the glory days of the Holy Roman Empire which lasted over 800 years, except of course that the centre would be in France rather than in what today is Germany. Sarkozy could certainly see himself as the first Emperor.

Yesterday, as the Telegraph reports:


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