Appendix Two: Your Currency And You
What follows is another, ahem, Captain Obvious effort. But as we clearly live in times where obvious facts are either ignored or considered offensive, it is fitting to write a line or three about it. With this also ends my mini-holiday from the antics of Francis. Starting from tomorrow, it is business as usual.
Let me introduce you to two Countries, which we will call A and B.
Country A and Country B compete in the same markets for, say, cars. Country A is efficient, well-ordered, and largely free from corruption. Country B is inefficient, chaotic, corrupted, and populist. Their currencies are exchanged at parity, because, say, Country B has just made a currency reform to adjust the nominal value of its currency.
Soon, the cars of Country B will find it very difficult to compete with the cars of Country A. The inefficiency and corruption at all levels of Country B will take care that it is so. In order to remedy to this, Country B will find it very convenient to devalue its currency against the currency of A; or, in a system of free currency markets, the market itself will, on the whole, care for it and progressively demand that for every Schnaps (the currency of Country A) not more 1 but 1.1, then 1.2, then 1.3, then at some point 1.8 or 2 Ouzos (the currency of Country B) is paid. The devaluation cares that the equilibrium in competitiveness is, on the whole, re-established. More clients of Country A will consider buying the now cheaper – but same, perhaps better value-for-money proposition – car from Country B, whose devalued Ouzos make it cheaper in Schnaps; whilst many clients from Country B will find the car from Country A now too expensive, because its price in Ouzos has increased following devaluation or, which is the same, the Schnaps becoming stronger against it. The same will happen in many other sectors of the economy: more tourists from Country A will decide to visit Country B (“look: only 399 Schnaps including hotel and return flight!”) less will make the opposite journey, etc.
It is commonly said that Country B has “become poorer”. This is true, but only in a sense. Country B has become poorer compared to Country A, but it has safeguarded its jobs. The factory worker of B couldn't care less that his holiday will have to be in his own country, if in exchange he can avoid losing his job. His Ouzos are Worth less Schnaps; but, crucially, he still has a job.
This is how it has always worked. The less efficient economies protected themselves by the effect of their lack of competitiveness by devaluing their currency, or allowing it to adjust automatically to the different paces of two different economies. Unpleasant as it was, it worked on the whole. Not everyone can be best in class.
Unfortunately, more corrupted and populist countries – like B – tended to be… populist and corrupted. The result was careless spending, which resulted in state deficit, which in turn caused big debt, or big inflation – because of all the “money printing” to finance the populist expenses – or, more likely, a mixture of both. This caused higher inflation, higher interest rates, more social conflicts, a growing debt, and more devaluation compared to Country A. The social conflicts then caused strikes, which caused loss of competitiveness, which made the problem worse, and caused more loss of jobs, and more government careless spending to appease the mob, and more inflation, and more deficit, and more debts, now more expensive to service because of the higher interest rate…
“How beautiful would it be” – Country B started to think – “if I could also benefit from the advantages of a strong, low-inflation, low-interest, stable currency! How beneficial this would be to my economy!”
Stop and pause here.
Country B wants a strong currency it has never deserved, because it was never serious enough to get one. But it wanted it anyway, thinking it would be all good, and with no downsides. Thinking, that is, only of the advantages it brings.
Country A listened to Country B and said: “I am very fine with that, dear neighbour. It would be advantageous for me too if you stopped being a chaotic, riotous, populist Country. Your increase in wealth would benefit me greatly! More cars to sell! More tourists to visit my country! Less inflation imported because of your incompetence (that's more complicated: take it from me…). Wunderbar! I am, therefore, all in favour of the two of us having the same currency! However, in order for this to work we will have to have ze same rules, Ja? This means that you, as a Country, will have to become as good as I am, because the low interest rates and low inflation and strong, stable currency do not fall from the sky, but are the result of sensible economic policies!”
” ' Course! – said Country B – “all fine! Everything you want! Give me the 1% inflation and 4.9% interest rate for my new car, please!”
And so it came to pass that Country A and Country B had the same currency, the same rules, and the same great expectations. There were, here and there, some isolated warning voices (one was yours truly's) who said to family and friends “this can only work if people, nay: entire countries change; and the odds of this happening are extremely small”. But they weren't heeded. “When people get to experience the advantages of a strong currency, they will change!” most people said.
However, Country B continued to have double the civil servants it needed; to pay stupid “pensions” to people who had never worked, and to hire 13 people for every ten needed, who then kept looking at YouTube in the office; to make a point of hiring the mistress of the boss, the stupid son of the manager, and the daughter of the local politician who could do them favours by the next public contract. You know the drill.
Result? The deficit was still there. The boost to the economy given by the low interest rates (money for a new car in instalments, a new gadget, and so on) were soon gone. Why? Because the economy was still inefficient. Soon, Country A's cars were gaining ground in all markets, again, whilst Country B had not even brought the deficit under control.
Could Country B now devalue its currency? No, it couldn't! Could it print money to cover the deficit? No, it couldn't! Could it, at least, borrow it? Yes, until there are creditors ready to lend it!
Country B should by now begin to realise that strong currencies really do not fall from heaven. They must be deserved every day with fiscal responsibility, work ethic, and efficient capitalism. If this is not the case, the strong currency will not help Country B in the least. In actual fact, it will strangle it. It must be so, because a strong currency will expose all the weaknesses of a weak economic system even as it deprives it of the traditional way to get away with it: currency creation, vulgo: “the money press”.
Mind, though, that for the unavoidable crush will not be the currency that is to blame: the currency merely does what it is designed to do, and what Country B wanted: low inflation, low interest rates, strong and stable foreign exchange. Nor can those be “blamed” (beside of stupidity, or naïveté) who in good faith – or because they're stupid – have lent the money to an inefficient Country to help it to become efficient. Yes, there can be a political interest to help the “less fortunate” brother. But in the end, the blame is entirely on those who wanted the strong currency, and thought they could get away with not paying the price that came attached to it.
Greece has made everything wrong. But this is not Germany's fault. It is Greece's fault. How rotten the mentality over there is was made entirely obvious not only by the continued lies and frauds, but – more tragically – but the astonishingly blind behaviour showed both with the last elections and with Sunday's strange “referendum”. The latter is, in itself, the best demonstration of Greek suicidal stupidity, in that it asked the Country if it thought the Germans should do as the Greek please, or not. After which, we were told by the Greek Prime Minister that this was a democratic decision, and we must listen to it.
The Euro is a very strong currency. The Germans, the Dutch, the Austrians want it so, and they are perfectly right to want it so. The low inflation and low interest were a gift they made to us (us Italians, French, Spaniards, Portuguese… Greek!), and we woke up one fine day in a low-inflation, low-interest environment we had done not much, or not for a long time, to deserve. But a strong currency costs a lot to maintain: it is like an elite gym, where you can survive only if you are fully determined to be as fit as the elite gymnasts who practice there.
Some countries did it brilliantly (say: the Dutch, obviously). Some others managed to stay afloat and made great strides of improvements and modernisation; but the now very harsh, direct competition with the very best without the possibility to devalue the currency was paid by them at the expense of economic growth, so that whilst Germany, on the whole, prospered they, on the whole, stagnated (Italy is an extremely obvious point in case). Others still, who thought they could feast and have the bill paid by the rich neighbour, are drowning all right, and chief among them are the Greek.
What too many people don't get is that the Euro is a “swim or drown” currency. You either learn to swim with the best or you will go down all right. Strong currencies come to those who swim hard, not to those who sit at the board of the swimming pool complaining about how cold the water is whilst looking at the girls, and insult the swimming trainer who tells them they must seriously move their ass or leave already.
I have lived and worked in three European Countries. I have seen so many examples of efficiency and inefficiency, seriousness and populism, best candidate hired or the mistress of the manager, that I could write a book. And I have dealt with Greek companies, too. And could not believe my eyes.
You drink all the kool-aid you want.
I will keep my brains switched on.