Pete,
Your proposal of a Euro-Jr is interesting and it has some merit but,
other things being equal, it would work no better than the existing
Euro (except for one possibility).
The conventional 20th and 21st century (fiat) currency of any
government exists only by how much confidence private people or
institutions have that they will be paid back (in real value) if they
lend money to the government if its expenditures continue to exceed
its existing ability to tax. If they have no confidence in the future
competence of a government then they won't lend -- that is, buy
government bonds. If they have full confidence, then they might buy
bonds with little or no risk premium above about a 2% annual return
(that is, that the normal level of compensation people require for
not investing it elsewhere or hoarding it for emergencies with
complete security under the mattress.) If potential investors think
that the future financial conduct of a government is risky then they
will demand higher annual returns on their bonds according to the
level of risk they perceive.
When the Eurozone started 11 years ago with such mutual back-slapping
bombast (in effect, "we're going to challenge the dollar!"), then
private investors, banks, pension funds and other naive institutions
were bamboozled into thinking that the initial value of the Euro
would be maintained by prudent financial control. However, they
didn't realize that, despite all the wonderful aspirations, no
Eurozone government had actually been set up with the ability to tax.
There was a money-printing central bank all right -- the ECB -- but
that's only the half of it. There was no taxation system or budgetary
control over the Eurozone territory. Reduced to essentials, there
were only voluntary contributions by prosperous governments (and
their electorates) such as Germany to the less prosperous countries
such as Greece. Thus, initially, when investors bought Eurobonds
issued by Greece they thought they would have the same potential
value as Eurobonds issued by Germany. Because Germany and Finland and
one or two other countries have become increasingly reluctant to be
so charitable in the future, investors now know otherwise about
Eurobonds. Those who buy Greek Eurobonds now require a return of 30%
per annum (and still rising) due to the risk factor of a culture and
economy that has been enticed into becoming charity-dependent over
the past 11 years. Obviously, this can't continue for much longer.
If, however, Greece and other similar countries such as Ireland,
Spain, Portugal and Italy, were to form a Euro-Jr-zone then exactly
the same situation would apply. There would be a relatively
higher level of prosperity in one of them, but it would be
distinctly lower than that of the Eurozone as a whole and it would
thus be most unlikely ever start to be charitable to the others.
Unless the Euro-Jrp-zone also had a unitary taxation and budgetary
system (that is, imposed by a new central government), the Euro-Jnr
would have no more chance of surviving than the Euro.
The Eurozone is now debating whether to issue a new type of Eurobond
(that is, a real bond this time) but this would require a new
pan-Euro government with the ability to tax as well -- so that
investors would have confidence in lending with sensibly low rates of
return. So far, the political and the civil service Eurozone cliques
have not dared mention this to their electorates. The consensus of
objective observers so far is that the possibility of persuading 17
different electorates agreeing to yield their sovereignty to one new
taxation authority is pretty well zero.
Ironically, the central banks of America, England, Japan, Switzerland
and the ECB itself (!) have decided to guarantee the survival of the
Eurozone until the end of the year. The irony is that the governments
of all of them, except Switzerland (almost the smallest country in
Europe!), are already so deeply in debt themselves that any realistic
person would say that they have little prospect of ever paying their
debts off except with several years of hard grind. The only
non-bankrupt government with any large amount of surplus money, China
(and hitherto by far the largest investor in Eurobonds of various
sorts), hasn't been invited in this rescue operation. It's prepared
to help further but only if the Eurozone "gets its house in order" as
one of its spokesmen said yesterday.
The possibility I previously hinted at is that if the potential
Euro-Jr-zone countries were to form a competent taxation/budgeting
government then the Euro-Jr currency could survive. Indeed, if it
also needed a helping hand, then China would probably help with
initial loans. The Euro-Jr-zone could survive even if the Eurozone
didn't. Now there's a wonder!
Keith
At 03:28 16/09/2011, you wrote:
I've been musing about the arc of the currency issues evolving
in the EU, and given the recent insistence from key leaders that
Greece (et al, presumably) should remain in the EU, I wonder
if the solution will be to create a new currency, a sort of
euro-junior, for use in a tier of EU states to be relegated as
the EU farm league. This currency would be able to adjust
against the euro, thereby provide relief for failed aspirants
to EU financial discipline. The EU-cadet states would then retain
many EU benefits, while the number of currencies could remain low,
however many states found themselves sent down from the majors
due to a prolonged slump, thus keeping the overall bookkeeping
relatively simple. The currency would persist regardless of
the comings and goings of members of the B-team.
This strategy could provide a flexibility to the financial
configuration, allowing both a breathing space, taking away the
urgency for an all encompassing solution, and providing room
for playing about with various mechanisms to improve the overall
EU monetary system.
-Pete
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Keith Hudson, Saltford, England http://allisstatus.wordpress.com/2012/08/
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