This is ludicrous

The euro, like the Aussie dollar, floats. You cannot just “devalue” it. Bretton Woods is dead. The most you can do is emulate the Chinese. They keep the remnimbi undervalued against the dollar by buying up dollar denominated financial assets. Would that really be a good move for Europe?

How would the US react if TWO giant economies were trying to keep the US dollar overvalued thus impacting the competitiveness of US industry? I think you would get a very strong reaction, one that would not benefit the global trading system.

BOTH the euro and the US dollar are overvalued against the remnimbi. I doubt anyone can seriously argue the euro is overvalued against the US dollar. In fact I think one could argue the REVERSE.

Then we have this gem:

>>None of the euro zone countries are free from criticism in this respect, apart from Germany, the only truly virtuous economy that underpins the euro.>>

The Germans have been COMPLETELY DISHONEST about this. If they still had the D-Mark its value would have soared making their goods less competitive on global markets. By linking their strong economy to weaker economies they have, in effect, kept their (notional) currency undervalued. The euro turned out to be a stealth devaluation of the D-Mark.

What ails the euro is not Greece but the fact that disparate economies with no central budgetary authority have joined into a currency union. No such currency union has ever survived a stress test.

There is a lesson here for Australia. If WA and Victoria were separate countries the WA dollar would be soaring on the back of the mining boom while the VIC dollar would be more stable or maybe drifting down a bit. As it is industries in the non-mining states are suffering because of the high Aussie dollar. It’s called “Dutch disease”.

See:

http://lexicon.ft.com/Term?term=dutch-diseas

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Dear stevenlmeyer,

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So called "pure free floating currencies" exist in theory only. In practice most governments at one time or another seek to "manage" the value of their currency through changes in interest rates and other controls.

They can flood the foreign exchange currency market with their currency to depreciate it or inversely, exchange foreign currencies for their national currency in order to appreciate its value.

The Fed in the United States and the Bank of England, for example, have intervened on various occasions in order to "manage" the value of their respective national currencies, despite the fact that both the US dollar and the pound sterling are both "floating" currencies.

The ECB is the equivalent of the Fed for the US dollar and the Bank of England for the pound sterling. It is the regulating body for the euro. It has the sole right (and duty) to "manage" the value of the euro in the interest of its principals, the euro zone countries.

The ECB has the power and the means of devaluing the euro if it has the political will to do so. However, it is difficult to imagine that the ECB would take such a step without German approval which, for the time being, is highly unlikely.

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Hi Banjo

As I pointed out, the ECB CAN manipulate the value of the euro against the USD as the Chinese do with the remnimbi. But they would most likely evoke a strong reaction from the US. You might even get a 21st century version of Smoot-Hawley.

See:
http://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act

Most economists believe that such "beggar my neighbour" devaluations and the protectionist measures they provoked deepened and prolonged the great depression.

Manipulating the value of your currency can gain you a temporary advantage - until the other side retaliates. The failure to acknowledge the likely US countermeasures is what makes this whole piece ludicrous.

I mean are you seriously suggesting that the US government, which is already coming under domestic pressure to take action against Chinese currency manipulation would fail to react?

Too blatant euro manipulation could see the whole global trading system unravel.

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Dear stevenlmeyer,

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You are right. It's not an easy equation to solve. A devaluation of the euro may possibly trigger retaliation from the major currencies and re-adjustment of the others.

The ECB would have to act prudently, sending out a few "feelers" to test the reactions before making any drastic moves. It increased its interest rate from 1% to 1.25% just two months ago to calm inflation which, in the light of the current crisis, was somewhat counter productive.

What it does indicate, of course, is that the ICB had no intention of considering devaluation as even a vague possibility two months ago.

The US is not really in a position to criticise others when you consider what they have been up to for the past couple of years, churning out freshly printed new dollar notes by the truckload in application of what they call their "quantitative easing program".

By that, they mean: keep the dollar low and competitive on world markets and achieve a lower value of sovereign debt.

The Chinese are not very happy about that. They are sitting on the world's largest stockpile of reserves, about US$ 2 trillion, most of it in US bonds that are difficult to off-load. They have little choice but to hope the US will stop their shenanikens as soon as they have positive growth again.

As for the Chinese, they may criticise others but they are not exactly as white as snow either when it comes to the question of national currency management. The yuan is not a floating currency. Bank of China maintains its value to the US dollar at a lower value than it would have it were freely traded. That gives it a competitive advantage on world markets. It has only recently begun to loosen its grips a bit in an attempt to jugulate rising inflation.

There is room for the ECB to manoeuvre in the current political and economical environment provided it does it carefully and intelligently.

A major monetary disaster in Europe would have negative repercussions world-wide that would not spare any nation.

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Banjo

There’s plenty of guilt to spread around. NONE of the countries involved have behaved well, or even intelligently.

The Chinese should not have accumulated such a large cumulative surplus. In Keynesian terms they have set up the world’s biggest liquidity trap. In addition, by keeping US interest rates low they permitted US banks to get up to their shennanigans.

The Americans should have regulated their banks better and, failing that, let the affected banks fail.

The Europeans should not have tried to shoehorn a lot of disparate economies into one currency union.

I could go on and on.

And the madness is not over.

Here’s a frightening statistic for the US.

The federal and state governments combined spend almost as much per capita on healthcare as the Australian government. Add in private spending and the US spends almost 20% of GDP on healthcare.

And what do the Americans have to show for this?

Compared to Australia, significantly lower life expectancy and significantly greater infant mortality. In addition medical expenditure the greatest single cited cause of personal bankruptcy in the US.

The US healthcare system must be the worst consumer bargain in the history of the world. And no one seems able to tackle this problem.

If the US adopted a policy similar to Australia they should have:

--Better life expectancy

--Lower infant mortality

--A saving of over a trillion per year – more every year than was spent on rescuing their rotten banks - about as much every year as the cumulative cost of the Iraq war to date.

This article does not express a lot of knowledge re the Euro's institutional stucture. And of course, flaoting currencies do not devalue, they adjust to market forces. What the author might mean is that the ECB could conduct interventions to change the market rate. That is highly unlikely. As regards the "correct" USD/EUR rate: no one knows. The historic rates merely reflect historic market equilibria dominated by financial (not trade ) flows.

As to the effect of a Greek default on the EUR/USD: no one knows; the market had has plenty of time to discount this risk and it is highly likely that most holders of Greek debt have already market to market or sold. Whatever damage there is to the capital of ECB and European financial institutions is a tiny fragment of the EUR zone's capacity to repair.

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Dear Rien Huizer,

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You wrote: " ... flaoting currencies do not devalue, they adjust to market forces. What the author might mean is that the ECB could conduct interventions to change the market rate"

That is a fair description of the normal management of a floating currency. However, what the author is talking about is not the normal management of a floating currency. He is talking about the deliberate devaluation of the euro to avoid the insolvency of those countries in the euro zone that are badly suffering from the financial crisis. It would require a significant exchange rate reduction for it to achieve its purpose.

That would be an exceptional step for the ECB to take and quite different from its normal management procedures. Such a decision could only be taken by the Governing Council of the ECB consisting of the 6 members of its Executive Board plus the governors of the 17 central banks within the euro zone. It would not be a technical decision. It would be a political decision.

Whether currency exchange rates are fixed or floating, governments always find ways and means of devaluing them if they want to. The techniques may vary but the results are the same.

Call it what you will. Devaluation is just a common term that most people understand.

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Dear stevenlmeyer,

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I couldn't agree with you more about the Americans and the Chinese. I remember reading somewhere that a high Chinese official said recently when commenting on the Americans printing so many bank notes to keep the value of the dollar low: "the Americans spend tomorrow's money today and we spend today's money tomorrow".

I think that was probably a bit of an exaggeration. The Chinese keep most of their money under the pillow or in the bank rather than spending it.

You wrote: "The Americans should have regulated their banks better and, failing that, let the affected banks fail".

I agree with the first half of your sentence but don't forget Lehman Brothers that nearly brought the whole banking world down when the Fed let it go into bankruptcy. That was such a scare they did everything they could to prop up the AIG which was also in dire straits and could have produced the same domino effect.

The world of finance is so globally interconnected now you have to be careful. When one catches cold they all start sneezing.

As for the US healthcare system, I am afraid it's a bit of a mystery to me. I do not know enough about it to be able to comment. All I can say is I hope I never have an accident or fall ill while I'm over there. I have heard some horrific stories of some of the people I know, one of whom a young, healthy American work colleague of mine in New York who had a very minor operation and died as a result of an anaesthetics error on the operating table.

The whole system seems totally unmanageable, unaffordable and the problems inextricable. Too complicated for me.

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@ Banjo Paterson,

I guess we disagree on a matter of semantics. Forcing the market rate lower of a floating currency has the same first-order effect as devaluing a fixed rate one. Hopwever the dynamics around fixed and floating rate currencies are completely different. Unless the EU (the sponsor of the EUR, not only the EUR zone members) would create mechanisms to establish and especially enforce a fixed exchange rate (which would require capital controls), constant intervention would be required to manage the rate at the levels established by the intervention. Since the markets would have to explore the ECB's credibility in setting such a rate, there would be numerous challenges and maybe the thinkg would fail, in similar ways as plans to stabilize EUR sovereign interest rates have so far failed: there is insufficient belief that ALL EUR current zone gvts will be able to raise the revenue from their local economies necessary to service ALL of the EUR area's sovereign debt denominated in EUR. By itself that should not be a problem, but the institutional arrangements around the ECB were schizophrenic from the start: it is the lender of last resort of banks in the EUR zone and as such it would be highly impractical if banks carrying local sovereign debt could not use that debt for discount operations (whcih leads to a build-up of excess debt in the ECB) and, as was envisaged in the Stability Pact, fiscally misbehaving members should be expected to default. It is the latter feature that has been used too little and too late. And now the collateral damage (pardon the pun) would be too great.

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Dear Rien Huizer,

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I agree it's by no means a simple matter to sort out. If it were it would have already been solved by now. I have no doubt at all that the ECB has all the resources and expertise necessary to devalue the euro and keep it devalued for as long as it considered it was necessary, if it wanted to.

It seems pretty obvious though, that it has no intention of doing that in the foreseeable future. It increased its interest rate a quarter of a point just two months ago. It certainly would not have done that if it were considering devaluation.

The French banks have just worked out a deal that has been rating agent tested for non-default qualification, involving a roll-over of Greek bonds to a 30 year maturity. I understand the German banks are also willing to support the deal. In addition the banks are reportedly willing to put some of their own money in the pot. This comes on the back of the recent vote by the Greek parliament to implement the new austerity measures imposed by the ECB and the IMF.

All that is fine but none of those measures are going to get the people back to work instead of rioting on the streets, nor is it going to stop corruption, bring in the € 20 billion per year of unpaid taxes, stop the whopper sale of national assets, reduce the massive unemployment, or kick-start the economy back to life.

The current strong euro policy of the ECB is fine from a Germany point of view but the Mediterranean countries, Ireland and Belgium are all hurting badly and could do with the sort of economic boost they could get from a devalued euro.

Of course it is their own fault. Of course they should have built their house in bricks and not in straw or sticks. But, as in the fairy tale, the third little pig sheltered the two other little pigs from the big bad wolf. Today's shelter could be a devaluation.

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