The European Monetary Crisis Explained

The European Monetary Crisis Explained

July 1st, 2012 JurnalPhobia from various sources (ongoing)

This writing will only give a brief explanation (mainly only my self note) about the origin (it is believed) of the european monetary crisis across the European Zones. It also questions whether the single currency brings more advantage than difficulties.

The so called, European Monetary crisis problem stems from a confusion between money for exchanges within a country and money for international trade.[i] Greece is not the only country from which the problem arises. Italy, Spain, Portugal, Ireland and France are following too. There two big perspectives spread across the international business analyst. First, if problem states decide to leave Euro single currency and return to their respectively national currency. Second, of course larger portions expect that problem states do not withdraw from the euro. Third, there’s possibility that a problem state decides to apply double currencies, its local one and the euro. Recently, only China has applied the principle of separation of internal and external currencies which results much benefit from it.

We still remember when the European states started to apply single currency. It was in the 1990’s the major European states decided to have a common currency. They managed the transition into two stages. First, they start in business transaction in 1999, and then for all citizens in the beginning of January 1^st, 2002.[ii] Greek who joined the Eurozone in 2000 also followed the operations. Greek gave up her drachmas, local currency, and issued a single currency of Euro. Afterward, Greek firms and citizens bought goods and services anywhere in the Eurozone with their euros. Who would have known that there will be confusion in the future, that is possibly leading to monetary crisis?  Second, the problem rises from the monetary flows within the country and from those across the borders.

We noted that the problem rise from Greece. What happened in Greece was, Greece followed economic policy which consisted in spending more than its revenues (received taxes). In the past, Greece printed drachmas to make up for its budget deficits. It amounts to fiscal and monetary policy where tax revenues are produced with the printing press. Some states believed that this system promises price stability with other advantages and drawbacks.

Across the borders: no longer able to make up the deficits. Greek government began to borrow euros mostly from foreign investors. Big European lenders were happy to lend Greece because the interest rate was high. Their actions also followed by the belief that Europe would refund them if Greece failed. (This begins to absurd; we knew who should be guilty and blamed, didn’t we?). It was also worsened when private Greek agents borrowed within the country and abroad too.[iii]

Out of the monetary problems; the single currency enabled citizens and privates to buy goods and services more easily than previously using drachmas. What happened was a deep imbalanced trade. Greek was spending too much. Greece paid its imports with exports with promises and Euro which meant more Euros were flying out of the Greece. Greece soon was threatened from running out of euros.

The European Community leaders were responding differently. Angela Merkel opposed extending Greece further loans and preferred to reschedule the due payment. France, through Nicholas Sarkozy, favored new loans in euros because France had the same situation with Greece.

Meanwhile, to prevent getting worse, and also to reduce the deficits; the Greek government began to cut salaries of civil servants, pensions of retirees and public spending (sounds reasonable). As a result, people had less money to buy, shops had minimum buyers and suffered, the rest numbers of Greek had limited money to buy their daily expenditures. Loss hit the whole Greek, people, private, and government.

·         Withdrawal from Euro Currency

Withdrawal from Euro currency is simply against the early constructions (idea) of European Union. The opinion against Euro withdrawal comes from the bankers.

·         Why they shall not leave Euro?

·         Double currencies: benefit and loss

·         Possible Solutions: a temporary payment form?

Andre Carbannes suggests the new form of temporary payments to facilitate production, exchange, and consumption. This temporary payment works as a voucher that enables to exchange the Euro currency into drachmas (or Euro drachmas). This temporary payment can become local money.[iv] I believe this suggestion needs lots of studies and analyst before it actually can be applied.  What I mean is, it is not an easy task to issue this temporary payment. The people may not be well prepared. And even to worst, the temporary payment form has a little confidence to work as national / local money.

It is believed that Greece will not leave Euros. Although Greek Government has no longer has Euros, they still have opportunities to buy Euros back. Greece will only to use a Eurodrachmas for internal/ domestic payments. Eurodrachmas is closely understood to issue bank notes as a temporary payment form.  All domestic payments must be made into Eurodrachmas. All foreign contracts will have to renegotiated and paid in Eurodrachmas.

Another solution is to learn from China. China is the only country able to separate between internal and external currencies. By doing that, China has gained more advantages than loss. “It used the dollar for its foreign trade and the yuan/renminbi for its internal affairs. It applied the separation principle in its strict version, taking measures to prevent the yuan/renminbi from becoming an international currency. After 1980, it became again a strong exporter (as it has been during most of history since Roman times). Its dollars were employed to import goods and services, to make foreign direct investments (in Africa for instance) and to buy foreign securities, mainly US Treasury bonds. Unfortunately these are likely to lose much value, and it is not a solution for the future.”[v] I believe that this measure will require deep study before being applied other countries.

Reviewer note:

I like the way Andre Carbannes shrewdly explains. He mentions all the possibilities to solve the Euro monetary crisis. He gives a brief explanation on what triggers the crisis, and it is very easy to understand. I have been observing and following current news of Euro crisis. From my understanding, it becomes sophisticated although it basically simple (triggered by a state). How this crisis then threatens the world economic, Indonesia and the rest of the world, is hard to believe. You can say it’s almost catasthropic. I myself, don’t have belief that it will be solved sooner by giving bailouts. I just don’t believe that loans will secure one states economy or trade. The problem itself sets in the banks practice, investor, and so called “speculation”. It seems to me, that those entities are more precious and sovereign that any state in the world. (RC-JP)

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[i] Andre Cabannes 2011, “The European Monetary crisis explained”, Lapasserelle, August 2011, revised on February 2012, http://www.lapasserelle.com/billets/greek-crisis.html; Andre Cabannes is a PhD Stanford University, California, USA

[ii] Andre Cabannes 2011, “Adoption of a common currency in Europe” in The European Monetary crisis explained

[iii]

[iv] Andre Carbannes 2011, “What will happen next? A local Currency” and “When a local money is already there, unnoticed”

[v] Andre Carbannes 2011, “The Case of China”: “China, like every other country on earth (except the United States), recognizes that the dollar cannot continue to be the world international currency. A new currency must be created that is not at the same time the currency of one country. Several solutions are possible. But China strongly favors a solution via the IMF. Why? Because it wants to get rid of the 3000 billion dollars of securities mostly denominated in dollars it holds (from its huge trade surplus of the last thirty years - it is likely, if you look around you, that many garments and other objects come from China), and wants to redeem them for another more trustful currency. If the international community were to adopt a new currency managed by a private outfit, it is unlikely that this outfit would accept the Chinese paper claims on the US and other countries. These would lose most of their value (they would become "American bonds", like the French know "Russian bonds"). Whereas if the IMF were to create a new international currency, more decisively than it did with the SDRs in 1969, it would issue it to central banks of countries in exchange for financial assets brought by these countries. And for a while the IMF would accept the Chinese holdings at a good exchange rate with the new currency. It is with this objective in mind that China secured the position of deputy managing director for Mr Zhu Min in July 2011.” I have no knowledge yet on this matter L