Although even today there are still many so-called experts who gleefully proclaim the strength of the euro against the world’s other currencies, the reality is that these days the advantage lies with those who devalue their currencies. In fact, this has always been the case during difficult times for a country’s economy. But globalisation has changed the world, including in terms of currency relations, and when macroeconomic difficulties are now global, someone must act as Lesser White-fronted Goose (EU). In other words, at least one of the world’s major currencies must appreciate as a counterbalance to those that are depreciating, thereby boosting the latter’s competitiveness and giving them a better chance of eventually recovering from the Great Depression.
In fact, the whole of the European Union would benefit greatly from a competitive euro that would boost exports and lift GDP figures across the Eurozone. But for that to happen, it would need to lose value against the other major currencies—namely the US dollar—and the other secondary currencies (GBP, JPY, CHF and a few others). In other words, it would require part of the developed world, with economic clout, to have a strong economy capable of supporting those in dire straits. It would need to strengthen its own currencies, thereby allowing the weaker currency to gain competitiveness and thus revive the economy of the poorer country. But no. Today we are all in a bad way, a very bad way. And no one wants or can afford to play the role of a strong country and currency. We all need a devaluation as much as the air we breathe, Americans and Europeans alike (some more than others). The last one is a fool. And the last fool, until now, has been the brand new and strong €, much to the delight of short-sighted Europeans and nimble non-Europeans, with their respective central banks.
At The Era of Devaluations We mentioned several reasons why it was difficult to devalue in order to get ahead. One of them was the inability to secure funding that a country would have the ability to devalue its currency independently, as in the past. But in recent months we have seen how, even within the Monetary Union, the sovereign debt of some states is trading at much higher levels than others, making financing more expensive, even with a single currency. For example, Ireland and Spain, and Germany and France, have been trading at very different levels for several months now. But the reason is not solely the risk premium for state insolvency or bankruptcy, as there are very significant differences even in one-year bonds; it also reflects each country’s greater or lesser ability to overcome the recession in the medium term, and perhaps to some extent in the short term as well. These disparities are likely to widen in the coming months, as the shortcomings of both sides become increasingly apparent. The fact is that, just as happened with the imbalance we detected in April 2008, the economic landscape will also tend towards rebalancing. In other words, either financing costs will converge once again amongst member states of a European Union that is economically moving towards convergence (unlikely, in our view); or the differences will widen and divergence will bring down the Union, starting with its financial sector.
This scenario leads us to the economic Euroscepticism (rather than political), whether voluntary or involuntary. How long will the EU be able to keep rich and poor countries on the same page in such a difficult environment? This global crisis is preventing a competitive currency in an environment of «foolish the last«It may not go so far as to sever the EU’s political ties, but it will destroy an economic union that seemed to balance out the differences between countries. But it only seemed that way. And this collapse will plunge many into poverty, especially those countries that lack the courage and/or the capacity to take such drastic and draconian measures.
«Once the impossible has been ruled out, whatever remains, however improbable it may seem, must be the truth.’.«
Sir Arthur Conan Doyle (1859-1930)