Why is the Euro so Strong?

With chaos in the negotiations with Greece, rumours of potential bankruptcy in Italy, and real concerns about the economies of Portugal and Spain, you would expect the currency that binds all these countries together to be falling through the floor. The graphic indicates that, over the past calamitous year, the range of movement has been between 1.48 and 1.28, and that at the value of the euro is hardly any lower than it was a year ago.

I was stung by a comment on one of my blogs from last week, complaining that I was being incomprehensible and jargonistic, so here I am going to explain simply why I think this is the case. This comes down to a discussion about what I have been calling for several years the 'currency wars'. When faced with hard times countries seek to return to growth and one means of doing this is to increase the volume of exports. Having a weaker currency makes your exports cheaper to the countries who buy them. So countries have been deliberately reducing the value of their currencies.

There are various ways of doing this. Some commentators claim that the US policy of quantitative easing is deliberately designed to achieve this end. Certainly, putting a lot of extra currency into circulation should reduce the inherent value of that currency. A more obvious way is just to lower your interest rates: since interest rates are effectively the price of money, this is an automatic means of making your money cheaper and causing its value relative to other currencies to fall.

To keep some sort of idea of the relative value of different currencies we need a standard, sometimes called the numeraire. In the 19th century gold was used as this standard, but this had all sorts of distorting effects on economic activity - primarily the fact that you couldn't increase economic activity unless bare-chested chaps deep in the bowels of the earth were digging up enough of a golden metal, which was frankly completely irrational, although emotionally appealing.

At Bretton Woods, the conference where the victors in the Second World War negotiated the shape of the world economy in the decades to follow, it was agreed, reluctanctly, to allow the dollar to take this role and to become the world's reserve currency. The consequences were hugely beneficial to the US in terms of imports, but ultimately destroyed its productive economy.

As the power of the dollar wanes, the other currencies that traders consider strong enough to take the role of a global reserve currency - the Japanese Yen, the Swiss Franc, the euro, and even sterling itself - have all become more attractive. This explains why we are not facing the speculative attacks that Greece is, not the performance of George Osborne at international conferences. As each currency becomes attractive to traders seeking a safe haven, the authorities that control its value seek to undermine it, since they do not want to suffer the export problems that result from having a highly valued currency.

In this form of reserve currency, the euro is still an attractive option and its interest rate of 1.5% now seems high by comparison with just 0.5% in the UK and 0.25% in the US. In addition, its competitors in terms of being the currency of last resort would resist its value falling too far, since that would require them to take more of the strain. This has led to the currency wars, which are a form of trade war in disguise. Because such wars cause international tensions, a solution that involves the creation of a neutralreserve currency, run for the benefit of the world's people and not an individual state, has long been my preferred option.
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Economics Students on the Move

How our economy will be organised in the future relies heavily on how our future economists understand the world and its workings, as well as their values. Economics education is obviously, therefore, of fundamental importance. The movements to reform economics education, shifting it from the realm of theology into one of pluralism and genuine debate, have been followed with interest by this blog.

So it is with delight that I heard this morning of the revolt by Greg Mankiw's students. Manikiw is the author of one of the most widely used introductory textbooks, as described by Geofrey Hodgson:

'Gregory Mankiw’s Principles of Economics, in its five versions, has internationally been the dominant basic text for more than a decade. Also its author was chairman of President Bush’s Council of Economic Advisers from 2003 to 2005.'

Here is the letter his students at Harvard, paying $40,000 for the privilege of biased and distorted information, presented to accompany their walkout from his introductory economics class, according to a US blog:

'Dear Professor Mankiw

Today, we are walking out of your class, Economics 10, in order to express our discontent with the bias inherent in this introductory economics course. We are deeply concerned about the way that this bias affects students, the University, and our greater society.

As Harvard undergraduates, we enrolled in Economics 10 hoping to gain a broad and introductory foundation of economic theory that would assist us in our various intellectual pursuits and diverse disciplines, which range from Economics, to Government, to Environmental Sciences and Public Policy, and beyond. Instead, we found a course that espouses a specific—and limited—view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today.

A legitimate academic study of economics must include a critical discussion of both the benefits and flaws of different economic simplifying models. As your class does not include primary sources and rarely features articles from academic journals, we have very little access to alternative approaches to economics. There is no justification for presenting Adam Smith’s economic theories as more fundamental or basic than, for example, Keynesian theory.'

The students undertook this action to express solidarity with the Occupy Wall Street movement.

Mankiw is a populist, using his own blog to blandly reassure about the existing economic model, blithely ignoring its destructive impacts and its lack of connection with reality. The fact that his own students are alive to this and are following the example of students in Paris and Cambridge in calling for an economic education that takes seriously the problems of the world we live in is hugely encouraging.
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Subverting the Agenda

An opportunity has arisen to test the nature of the democracy we live in. The powers that be have magnanimously agreed to allow we mere citizens to set up petitions on the Direct Gov website. It was this process that led to the fiasco of the debate over the European Union. But will the revolting peasants be permitted to enquire into the tax affairs of their betters?

To test what happens when more than 100,000 people sign to require that to happen we need you to sign the that has been launched on that very site. Please sign today and circulate the link far and wide.
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Politicians Paint Themselves into a Market Corner

The shenanigans over the rate of the feed-in tariff is a good example of the way in which politicians have, in accepting the myth of the omnipotent market, limited their room for manoeuvre and made themselves incapable of taking the steps necessary to ensure social and environmental benefit.

We can argue about the appropriateness or otherwise of the 43.3p set by Labour for the rate of the feed-in tariff and whether it was just a deliberate banana-skin for the incoming Tory government, but the broader question of who should pay the cost is what really demands attention. The transfer of money uniformly via energy bills in a market dominated by an informal cartel and from those who can least afford to pay, towards those who have the spare resources to buy solar panels to install and would then receive the tariff was always a questionable scheme.

Imagine a world where the production and distribution of energy was in public hands - local government rather than national, ideally - and where the cost of energy rose as you used more, rather than costing most when you use least. The extra money charged to heavy energy users could be made available via grants to local people, or used to directly fund the installation of solar panels on the roofs of the tenants of social housing, who are least able to pay their energy bills. You have neatly created a just solution and simultaneously generated sustained demand for solar panels, reducing costs and making them available at a lower price to those who can afford to buy their own. This is a political solution, but it is hardly communism.

In the end this decision to set a price to underpin the development of a market for solar in the UK, immediately followed by a reversal, is bad for business too. It gives a mixed message which is exactly the opposite of the clear signal businesses need to make investment decisions. It will have negative knock-on effects in other areas, as managers doubt political commitment to the transition to a green economy.

As the myth of the market itself corners the market in ideas, we see the consequences in terms of inert and impotent politicians, and we all pay the social and ecological price.
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Green Queasing Gathers Support

Last year Colin Hines and Richard Murphy of Finance for a Future called for money to be into businesses helping us make the transition to a sustainable economy, a call which has been by Green MP Caroline Lucas and repeatedly on this blog. If we are to create money it needs to generate truly effective demand, not just disappear into banking black holes.

A recent post to Power Switch, the UK's peak oil discussion forum details how such a scheme might work. Meantime, more rhetorical support was offered by Tim Jackson during his presentation to the Schumacher centenary festivities in Bristol earlier in the month.

Meanwhile a useful piece of research commissioned by WWF indicates another important direction that manufactured money should be directed: towards transforming our energy grid towards sustainability. The report's encouraging conclusion is that:

'This report makes it clear that decarbonising the UK power sector by 2030 in an environmentally sustainable way that avoids reliance on risky nuclear technology and high levels of unabated gas is achievable without compromising the security of the UK’s electricity system.'
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Mammom 1; God 0

The resignation of Giles Fraser, Canon Chancellor of St. Paul's Cathedral, is a clear sign that things may be about to get rather nasty for the economic justice activists claiming the church's sanctuary in the heart of the City of London. From the start he had welcomed their protest and made them welcome inside the church. The church hierarchy decided to to close the church to put pressure on the protestors - a decision that seriously backfired. Once it closed its doors a conflict seemed inevitable and Giles Fraser has been the casualty.

The worrying signs began with a news story, emanating from the cathedral, that it was losing £20,000 per day because of the closure. This immediately raised several questions: how could a house of God be so lucrative? Why had they voluntarily closed their doors to ensure that this income would be lost? And perhaps most important of all: what would Jesus have thought of all this?

Most historic churches now include a 'gift shop' which sells a range of tat to enhance church funds. While live chickens no longer change hands and the trade is always seemly and made in hushed, respectful voices, you still can't help thinking of Jesus overturning the tables of the money-lenders and questioning what should have been a house of prayer becoming a den of thieves.

This is a shame, because the various parts of the Christian church have a wonderful reputation for taking practical steps towards greater social justice. The fair trade movement arose originally from a Christian inspiration and grew up through the sale of coffee and tea on stalls at the back of churches. A more direct attack on Mammon was found in the work of the Jubilee 2000 movement for the cancellation of debt owed by poor countries, as well as the work of the Christian Council for Monetary Justice.

It seems that the final straw for Giles Fraser was a decision by St. Pauls to join in the legal action by the Corporation of the City of London to sue the protestors and achieve their eviction. We can expect ugly scenes in the City and huge damage to the reputation of the church, as those who are standing up for the poor against an oppressive economic system are battered and bruised on the steps of one of the nation's greatest churches.
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The Eurozone Crisis: A Warning from History

I am thinking of creating my own derivative, called a political default swap. This is how it works. We each choose a country and bet against the length of survival of its government as it tries to introduce enough austerity measures to keep the markets happy. It works like a sort of insurance policy, where the riskier the country, in this case the less able its politicians are to bear down on its people and extort their work to pay bankers' debts, the higher the cost of betting on it.

The manoeuvres by EU finance ministers in Brussels today conceal as much as they reveal and demonstrate that power is balanced between politicians and financiers. This is seen most clearly in the negotiation over the extent to which those who made risky investments in Greek debt will lose their shirts (or their hair). The risk seems to be approaching 50:50.

Harder to agree is how the effects of this on Europe's banks will be accommodated. If the banks take the full hit, the financiers argue, they will become bankrupt, leading to Credit Crunch II: Return of Debtonator. So the bank welfare fund has to be massively increased. We have grown tired of billions, yawn the financiers, we need to move into the zone of trillions.

But where is this money to be found? The devastated citizens of Europe, their bodies already straining beyond breaking point to keep the capitalist wheels turning, can offer no more. Eyes turn to the European Central Bank - can it be asked to create money from thin air, the sort of money bankers like best - power without responsibility? The Germans, with their historical fear of inflation, will not accept this option. The most likely outcome is a solution dreamed up by the very 'quants' who created this disastrous situation: a solution that uses a combination of mathematics and conjuring to make the money disappear through time, emerging at some future date enormously swollen in value.

In his masterpiece The Great Transformation, written in 1944 and reflecting on the last great capitalist disaster, Karl Polanyi describes the contortions that Europe's politicians went through in the 1930s to save the Gold Standard. They seem eerily similar to what we are witnessing today. The system must be saved, no matter what the sacrifice in terms of human lives and political stability.

In the 1920s financiers inflated a bubble which burst in 1929, but through the 1930s the economists defended the position of laissez-faire capitalism whose social costs were unacceptable to the people of Europe. The result was political polarisation, economic chaos and the rise of fascism. This crisis has already provoked the collapse of the Slovakian government, the government of Iceland, and the government in Ireland, and the Italian government could soon follow. Somehow the political system is still holding in Greece, but the massive civil unrest leaves it vulnerable. So, will you take my offer of a punt? Which country's political system would you bet on surviving this financial turmoil intact?
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