Euroclasm – Opportunity Knocks
At the root of the Euro crisis is one fundamental error in the dim dark past. The Germans for a long while suffered from a strong Deutschmark and so they should have because of their export miracle. So for those with long memories will recall that the launch of the euro at the turn of the New Year from 1998 to 1999 it originally traded at Euros 1.1795 to the US dollar. All well and good. This coincided with the last frenzied surge of the USD related to the tech boom that came to grief in early 2000. The Euro fell as low as 0.8225 in October of 2000.
After that event the Euro went on a tear, soaring on the back of Germany’s export performance and the strength of the export economies of the likes of the Netherlands, Austria and France during the good years as Greenspan and his followers ran the printing presses and US consumers went on a spending spree for European goods.
The euro was a boon for the Germans as it diluted the effect of the strong Deutschmark (until 2008) and created a captive audience of countries whose own export capabilities had been annihilated. Had the Euro never been introduced, the Deutschmark would have soared in the early part of this century and plunged Germany into a Japanese-style high- currency, low-growth scenario. That was, and is, Germany’s predicament and root fondness for the Euro experiment. A “core” Euro of only Northern European states would start soaring and bring back Germany’s eternal dilemma.
The problem for Greece, Ireland and Portugal was that what low tech industries they had were crushed by the rising exchange rate. Textile manufacturers faded in the face of cheaper Chinese competition while German machine tool makers essentially had no competition. The Euro eventually attained it’s all-time high l of 1.6037 in July, 2008 in the wake of the U.S. sub-prime mortgage crisis that led to the collapse of Lehman Brothers in September of that year. By that stage Portugal, Greece and Spain had been turned into economies built upon a nefarious combination of tourism and building booms while Ireland was a wonderland of tech company tax-dodging and riotous overbuilding until 2008 when it returned to its historical role as exporter of the destitute young (another factor in common with Greece).
Argentina and Greece – Parallel Paths
Get our daily investorintel update
It is useful to look at the two interesting currency “works in progress” at the moment, and these are Argentina and Greece. I won’t give a long disquisition here but… the British Foreign Office has now warned holidaymakers to take a lot of cash in euros, enough for several days, on their summer trips.
The clear message here is that Grexit may be imminent and when it comes a total paralysis of the Greek banking system might ensue with ATM cards AND credit card transactions ceasing to function. Speculation has also included rumours that in such a situation the state might start issuing IOUs which would become the “new drachma” and a medium of exchange. All this reminds us of the pseudo-currency BoCones (Bonos de consolidacion) that became a widespread means of exchange in the wake of the 2001 meltdown. The government of the largest province (Buenos Aires) paid its suppliers with these who then used them to pay their own taxes and utility bills and around and around they went with civil servants using them to pay their bills and eventually becoming a parallel currency in the whole community.
This was Gresham’s Law at work where bad money pushes out good. Frankly Greece adopting something like this would be the “soft” way of breaking in a new currency. After all, Greece and Argentina have followed parallel paths since the start of the 19th century with defaults and devaluations being meat and drink to the both of them.
That brings us to the current state of things in Argentina. Curiously BoCones are not the pseudo-currency of choice any more, Bitcoins are. Yes, apparently Bitcoins are becoming a favored means of exchange. We suppose it’s the spread of the internet and the fact that no provincial government in Argentina would dare fly in the face of Cristina Fernandez de Kirchner by issuing BoCones-like instruments again. Things are also different in that it’s not exactly an internal meltdown going on and inflation is steadily rising but not soaring. Now it is primarily foreign exchange restrictions and the heavy burden of taxes and levies that are driving the desire to transact certain barter-like transactions in the latest fiat pseudo-currency. Little does the man in the street in Argentina realise that Bitcoins are having their own swoon at the moment.
So it could be out of the frying pan into the fire. However, one might speculate that if Greece goes over the edge then Bitcoins might have to duke it out with “new drachmas” printed on toilet paper for the affections of the Greek public (and the visiting tourists) over the summer season.
Conclusion – PIIGs Might Fly
My observations on this subject are not merely academic as I rode the Argentine roll-coaster from 1989 until its bitter end in 2001. Defaults however are not new and not confined to Argentina (or Greece) alone. Malaysia instituted capital controls during the meltdown of 1997 and it was years before these were eased. The key difference is that Greece is in the Euro mechanism and its ejection or departure sets all sorts of precedents. For a start Cyprus, which is a “client” of Greece (and had its own banking crisis in 2013 that was barely contained) would definitely be an “odd-man-out” if it stayed in the Euro mechanism when the economy with which it is symbiotically connected departed.
Other European states that have had dodgy finances in recent years might be tempted to go NOT by the traumatic treatment Greece has had meted out to it but rather if Greece experiences a strong economic rebound post-departure. If Greece for instance was rocking and rolling again in three years from now, with its debt wholly or partially cast into the dustbin of history and the drachma back in full force then envious eyes would be turned by the Italians, Spanish and Portuguese who have long suffered from an overvalued Euro crushing their footwear and textile industries to the benefit of the Chinese and the Germans.
While I discussed Bocones/IOUs and Bitcoins as temporary alternatives that would be all they would be. Greece staying as a half-in/half-out participant in the Euro mechanism would be combining all the disadvantages and none of the advantages. A return to the drachma would be inevitable and indeed welcome. If I had been the Greek finance minister I would have had an enormous mountain of these printed and waiting in an aircraft hangar somewhere. However the mere whiff that such a stockpile of crisply minted bills existed might have accelerated things even faster than they have moved already. And that might not have been a bad thing with the all-important tourist industry seeing cancellations numbering tens of thousands per day. Greece needs a medium of exchange and it is quite clearly NOT the Euro if the circulation of them has dried up.
So will it be drachmas, euros, IOUs or Bitcoins? To paraphrase Gresham, let the worst currency win!
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>