Thursday 8 January 2015

Basic economics - it's all the exchange rate stoopid

Don't gloat at the fact that the Euro is falling in value because of the strains it's under and the possibility that Greece may leave the Euro (or be chucked out). The Euro will fall even more if the Germans let the European Bank go in for quantitative easing and start printing money to buy back debt in the way we have because, that too, is a process of devaluation. The Germans may grumble and complain about the unreasonableness of all the others in not squeezing the pips of their people with austerity. They'll attack the Greeks for being corrupt and lazy. But behind the scowls. they want it that way. They need the Euro to be a mess because that keeps the Euro down and that's the whole purpose of this stupid exercise. If Germany had its own currency it would be uncompetitively high, damaging their industry and their trade surplus.

On the other hand, because lots of the more feeble currencies are involved in the Euro, the exchange rate is lower and a cheap Euro (and a devaluation which is now going on) lower the price of their exports outside the EU and make their highly competitive exports even more competitive.

Germany built up it's powerful exporting economy by keeping the Deutsche Mark as low as possible despite the pressure from the USA to put it up. France and Italy kept up with it by regular devaluations. The British, being more stupid, tried to keep the pound as high as possible, partly because it was a national phallic symbol and partly because the City of London wanted it that way. So we declined. They prospered.

The development of monetary union meant that France and Italy couldn't devalue as much in the ERM while Britain, as usual, entered at too high a rate, couldn't hold it and was forced out in the 1992 devaluation.

Gordon Brown saw the dangers of a fixed exchange rate and kept us out of the Euro, but then kept the pound far too high to "fight inflation", something best done by destroying British manufacturing. Germany, however, welcomed the Euro because it helped keep their exchange rate much lower than it would otherwise have been. Not daft these Krauts. Had they they kept the
Deutsche Mark, with their enormous trade surplus, their exchange rate would have been cripplingly high that's how the market works and they couldn't let that happen. Big reserves über alles. But now France, Italy and the other members could no longer devalue to stay competitive, so they were forced to deflate, impose austerity and cut wages to compete with Germany. This turned the Eurozone into a high unemployment, low growth black spot and Germany the only country that really benefitted from the system declined to share its benefits by giving aid support and money to the areas which were suffering because they couldn't compete with Germany. Via Dolorosa is the way if you're not German.

So the Euro staggers on. It won't work. It can't without one budget, one finance minister and one system of redistribution. But they won't give up on it either. Greece may leave or they may agree to write off debts it will never repay. The tension will keep the Euro low on the currency markets and that keeps Germany's exports to the rest of the world competitive. That, in turn, will hit our exports both to Europe and to other markets and make our growing trade deficit worse until eventually we'll be forced into a massive devaluation too. It's a gloomy prospect all round. But not for Germany. Gehts gut danke.

Moral: watch the exchange rate. It's all that matters.

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