Sunday, December 26, 2010

Conspiracy over the euro

Conspiracies theories are always viewed with skepticism by scholars and public thinkers. But sometimes, it may help to understand the essence of phenomena and to go beyond conventional wisdom. It is not just a matter of belief but a hypothesis to understand the sequence of historical events as well as the motives and actions of secretive coalitions of interests.

The euro has been strongly attacked since 2009 and its evolution is subject to wide fluctuations. The euro crisis is not just the result of 'irrational exuberance' (as Alan Greenspan called it) of markets. Behind it, there are great economic powers which tend to influence economic decisions in weaker economies. Markets are not abstract entities; we are talking about powerful banks which influence -rather than anticipating- economic policy decisions, for instance on sovereign debt service. The core of speculative attacks stems from 'hedge funds' those funds which can bring high returns in times of low interest rates. But the brain is the international banking system which operates permanently on all financial markets, from New York to Shanghai.

The New York Times has explained recently how this 'brain' works and has indicated the banks at the core of the system - among which  J. P. Morgan, Bank of America, Goldman Sachs, Ubs, Crédit Suisse, Barclays, Citigroup and others. Each of them has a network of links and shares all over the world as well as a huge mass of capital at their disposal. Every week, senior executives from these banks meet to examine carefully the economic outlook in terms of employment, manufacturing output, exchange rates, mortgages, spreads on sovereign debts, commodities, and sometimes  political instability and decide on whether act or wait. Whilst the business community and right wing governments discuss about liberalization of markets, free competition and other dogmas of economic liberalism, free markets are in fact guided by a small cartel with unlimited resources and huge economic and political power. Remember, Karl Marx referred to a global banking cartel in the second half of the nineteenth century !

But international speculation is not directed at the exchange rate of the euro, but sovereign debts and spreads  on interest rates. It aims to increase the differential rates between weak European countries- with high public debt- and German 'Bunds'. The only institution which can challenge this is the European Central Bank, which, although it is not enshrined in its Statute, has to reduce the 'spreads' among the euro area members. Differentials in interest rates have some underlying causes, such as a crisis of public finance or the banking system, or both. Speculators are attentive to these realities and influence them to decide the right moment to attack. Then, they retire when the European Central Bank comes into play and bring back home huge profits that will constitute the weapons to restart the game. The final objective is to split the euro area in two: on the one hand, a strong area with Germany at the centre and with the euro (or a D-Mark?) as a common currency  and on the other hand, a weak area with peripheral countries and a currency which might fluctuate around the euro.

If such a project materializes, it will open for international speculators a wider field of action which will bring huge profits. This will not inevitably happen as the euro area has strengthened its governance rules and will try to survive. The speculation will, however, continue its war and yield profits as long as sovereign debts will not be reduced and more importantly wide inequalities in economic development persist among member countries. 

The European Council of 16-17 December has decided to set up a permanent crisis resolution mechanism after 2013 and agreed to revise the Treaty accordingly to enforce it. This has been widely discussed and analysed during last months after the Greek debt crisis and the subsequent Irish crisis has accelerated this decision.

Technically, it could be possible to stabilize financial markets with a large increase of the European Financial Stability facility - which was used to rescue Greece and Ireland- together with an increase of the ECB's purchase of government bonds. In practice, this would mean a bailout of bond holders. Yet we need a long term solution.for Europe's economic troubles and the key lies in the establishment of a European treasury and a federal budget as advocated recently by J.Attali, former EBRD president*. One of the most important contributions of optimum currency area theory is, indeed, that a monetary union, featuring a central bank without a Treasury is unthinkable. But this, we're afraid, would be a long term endeavour.

P.S: Last Friday, Tommaso Padoa Schioppa passed away. He was a convinced European federalist, an idealist with concrete ideas and he participated to the creation of the euro. His lessons should not be forgotten.

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