All Greek to them
Yesterday (Thursday), the value of the euro fell below 1.40 to the dollar. Two months ago, the value of the European single currency was over 1.50 to the dollar, seemingly moving toward the record level of 1.60, reached in the summer of 2008, before the crash.
At that time, the world was becoming increasingly disenchanted with the dollar. Scarcely a day went by without some big-wig expressing his opinion about the need to replace the dollar as the world’s reserve currency, or at least create a ‘multi-polar’ global currency system. Then, whilst the Americans were fressing their turkeys on Thanksgiving Day, Dubai reminded the world that it was a bust flush. Almost simultaneously, the new Greek government elected in August announced — in the process of presenting its budget for next year — that its defeated predecessor had cooked the national books. Specifically, it noted that this year’s budget deficit would be some three times bigger than the outgoing government had claimed it would be.
Those events mark a watershed in the global currency markets and, quite possibly – although this is much harder to prove – in the global economy. Dubai reminded people that the global real-estate boom and bust was not history but current affairs, whilst Greece focused attention on the uncomfortable, but unavoidable, topic of sovereign debt. It also exposed all the fault lines of the European Monetary Union (EMU) and, in Kennedy-esque language, demanded that instead of asking themselves whether the euro could or would replace the dollar, they should ask themselves whether the euro was going to survive at all.
Confirmation that the Greek mess was a major crisis came from the usual suspects: finance ministers and heads of state in Europe, as well as most analysts in large financial institutions, assured their citizens and customers that this was nothing of significance in the large scheme of things. In fact, the Greek crisis was massively significant, for several telling reasons:
First, it confirmed that the peripheral European Union and EMU countries were fundamentally different, in their economic structure but also in their governmental and cultural mores, than the ‘core’ countries. Europe was split between north and south, between rich and less-rich, between Germanics and Latins and, above all, between those who needed help and those from help was being demanded.
Second, it provided strong support for what may be termed the most constructive criticism of EMU, namely that it was suitable only for those countries genuinely committed to, and capable of reaching, the ‘Maastricht criteria’ (low inflation, budget deficits of not more than 3% of GDP and a debt/ GDP ratio of not more than 60%). The Italians, who cooked their books in 1997 to meet those criteria, should never have been allowed to join at the outset. The Greeks should never have been allowed to join in 2001.
Third, it highlighted the divergence between the political agenda, which had led to Italy et al being included in EMU for the sake of the grand vision of the European project, and the economic agenda, which focused on the narrower costs and benefits of EMU – and on who was going to pay the bill for the sub-performance of the also-rans.
Fourthly, it reminded everyone that there is no decision-making mechanism in Europe, in the sense that there is nowhere that is legally defined as the place where the euro stops.
The fourth point is the critical one in the Greek crisis. As the facts have emerged, the markets have savaged Greek government bonds and the ratings agencies have done their job, belatedly as usual, in downgrading Greece’s rating (as well as those of Portugal and other members of the PIIGS group of countries). The European Central Bank has made it very clear that it has no mandate and no desire to bail Greece out. The European Union ‘eurocrats’ in Brussels have urged the Greeks to get their house in order and, encouragingly, have doled out advice and expertise. But they, too, have made it clear that salvation (meaning a bailout) cannot and will not come from them.
We are now moving toward the endgame on Greece where, if the country is to remain solvent, somebody is going to have to come to its rescue. In today’s Europe, ‘somebody’ means Germany, usually with French support and perhaps actual involvement. And that’s how this is going to be sorted out – because if the euro stops anywhere, it’s on the Chancellor’s desk.
But meanwhile, the nonsensical idea that the euro could replace the dollar has evaporated. As noted frequently in this column, in the ‘ugly parade’ of major currencies, the dollar is by far the least-bad of a bad, bad bunch. That’s why the dollar’s value has been rising these last two months, at an increasing pace. Given that behind Greece is Portugal and behind Portugal is Spain and behind Spain is Italy, and alongside all these is the UK – all countries facing fiscal crises and whose governments must find the will and strength to severely dent their citizens’ living standards – it’s quite likely that this trend will continue for some time.