Note: This post is not about trading, it is an opinion piece. While the trades are working themselves out, I am indulging my deep interest in economics, history and politics. It is about big-picture, long-term economics; my opinion of why the Euro is a stronger currency than what the news media portrays.
The headlines over the past 2-3 years have been screaming doom and gloom for the Euro. If one refers back to the headlines during the Irish crisis, the Greek crisis, the LTRO, the Cyprus crisis, it seems absolutely incredible that the Euro still exists. Not only that, it has actually risen against all other major currencies in the past 2 years. For a natural sceptic like me and one that actively resists the brainwashing by the media, this in itself is an intriguing clue. Things are not what the news is reporting. What is going on? There is obviously much more to the Euro than is apparent on the surface. Here’s my interpretation of the Euro’s history, current problems, and potential future.
1. The Euro was planned and deeply thought-through for a long time before it actually became a reality. The architects of the Euro had lived through the gold standard, the great depression, the world war, the reconstruction and the cold war. They were students of economic history. That knowledge is reflected in the unique features of the Euro.
2. The Euro is primarily a political project. Its aims are political – to tie the disparate countries of Europe into one federated union where each country keeps its unique culture while at the same time enjoys the benefits of an economic union. A single currency is absolutely essential for this project. Mario Draghi often refers to this political underpinning of the euro when he says that most reporters vastly underestimate the political capital that has been invested in the Euro, i.e. the commitment of all Eurozone countries to the Euro. To talk of the death of the Euro betrays a total lack of understanding of the Euro and its history.
3. The Euro is designed to be a ‘hard’ currency. Price stability, i.e. a currency that keeps its value over the long term, is the only goal. The creators of the Euro believed that this is the essential condition for economic prosperity in the long run. The ‘hardness’ of the Euro is what is forcing the Eurocrats and Euro governments to contort themselves into ludicrous positions to handle the current financial crisis. Most of the English-language press see the endless Eurogroup meetings, the bland and often contradictory statements, the tortuous negotiations in the Eurozone as proof that the idiots don’t know what they are doing and that the Euro is doomed. In fact, I see this as evidence to the contrary. The strict rules of the Euro are forcing the Euro group into making hard choices. Behind the scenes the real masters, those who are fully committed to the Euro project, are holding the feet of the errant countries’ leaders to the fire (metaphorically! 😉 ). This manifests as long, tortuous negotiations and bland platitudes in public.
4. The Euro is the first currency in history to float freely against gold. There is a lot of depth behind that statement and I don’t have the time or space to go into the details of what this means, but it is a huge deal. In the past, all currencies have failed when compared to gold. The Euro has co-opted the historical ability of gold to hold its value and to correct international trade imbalances. This is the secret of the Euro’s strength. While gold is like kryptonite to the USD, gold is Euro’s friend. One never hears Euro officials complain about the price of gold.
5. There is plenty of practical evidence that points to the Euro’s fundamental strength. The ECB has NOT been printing madly despite what many superficial headlines say. Even the LTRO, which is a limited form of money printing, came with a very clear and rigid end-date. All entities who borrowed on the LTRO had to return the funds by the end-date of the LTRO. At each ECB press conference this year Draghi has been announcing how much of the LTRO has already been repaid before it is actually due. As the LTRO was an increase in the money supply, the repayment is a reduction in the money supply of the Euro. This inevitably strengthens the Euro, especially as the Fed, and now the BoJ, are printing money on a gargantuan scale. What else can this do to the Euro if not strengthen it?
6. The Euro countries’ problems are structural and political, as Draghi keeps repeating. It is up to the politicians to solve the economic mess. This is happening, slowly. The European people are feeling the pain, and we know that there cannot be any solution without pain. The US is living in Never-Never Land if they think they can have their cake and eat it too. The bill for the US’s economic excess will come due some day, if not this time. At least the Euro countries are taking the bitter medicine right now and will eventually emerge stronger because of it.
That is why I think the Euro will be a much stronger currency years from now.
Of course, nobody should use this argument to go long the Euro! Trading is about crowd psychology and it should be based strictly on charts, which represent market psychology.
Edit: Although I support the Euro in its design, I don’t support the huge bureaucracy that has grown up around the Euro project. With the Euro as a pretext the Eurogroup has got involved in every aspect of European life – agriculture, health, transport, industrial policy, etc. This is not necessary for the Euro to work, and is an example of how bureaucracy grows like a tumour.