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Dantius

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Syriza has won a resounding victory and formed a coalition government in Greece, seems poised to try and renegotiate austerity and the bailouts, Hollande's approval rating has doubled, the ECB is firing up the presses for QE: We're Worse At Our Jobs Than The Fed Edition, the Euro has fallen by 30% to 1.12 against the dollar, and Switzerland decided to troll everybody by dropping their currency peg.

 

In short, interesting things are happening in Europe. Let's discuss them.

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In relation to Greece and Syriza, I think it's useful to compare the economic indicators in Greece for the last few years to those in the U.S. during the Great Depression. Note that Greece is a little bit worse off than the U.S. was even at the worst point.

 

Whatever you think of the situation, you have to admit that what has been going on is not working. At least not if part of the goal is for Greece to recover.

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At least not if part of the goal is for Greece to recover.

 

I don't really buy into a lot of the memes surrounding Greece to the effect of "Oh, it's just a transfer from poor greek citizens who are totally innocent to evil banksters by neoliberal Eurocrats", but honestly, at this point I'm seriously questioning if there's active hostility to the idea of a Greek recovery by the powers that be.

 

I mean, deep down, I think everbody knows that Greece isn't ever going to be able to pay back their debt, regardless of what policies are enacted. So is this just an elaborate piece of kabuki where Greece gets hammered down so that Spain and Italy don't get any ideas? Because that just seems like a terrible policy to me. Mississippi wouldn't be able to pay down their share of the US debt, either, but we don't punish them for this in order to make an example for Alabama.

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Sorry, I'm having trouble understand Switzerland's lowering of their currency peg. Does that mean the exchange rate for Switz franc is lower and thus monies within Switz banks will have a lower value?

Edit: Thanks for explaining Count Hogan

 

Also, I think all the debts of the world will never be repaid. This system runs on the fact that people owe each other money. Much similar to Alexander's Hamilton's idea of the beauty of neutrality reassurance through repayments.

And the dropping of the Euro might not be bad. People might actually start investing in Europe more or something

Edited by Red Night Saint
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Really there should have been two euro currencies.

 

Euro1 for France, Benelux, Germany, Northern Italy, Austria, Finland, Baltics.

 

Euro2 for Spain, Southern Italy, Portugal, Greece, Balkans.

 

(I don't know which category to put Ireland and Slovakia in)

 

I don't know why anyone thought it was a good idea to cram the general Greek lifestyle into the German fiduciary. I don't really think it was a worse thing, just a different thing, but certainly a worse thing when you make believe that Greece is supposed to be industrially or culturally equivalent to Germany. It was almost doomed from the start.

 

Greece exiting is going to be a blow to Europe too - it's easy to blast Greece as underproducing but when squeezed under a system that doesn't mesh with their cultire - should they? And people tend to forget about the significance of the Greek Navy which does a bangup job keeping the eastern Mediterranean safe. Europe gets a significant benefit from Greece's military spending. Greece has been spending quite a bit on defence, especially navy, ever since Turkey invaded Cyprus in the 70s.

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i mean if we split the eurozone into two mini-eurozones, why not go further. we could give each country its own variant of the euro! and we wouldn't even need to call it the euro, they could have cool names like...francs and marks and drachma.

 

wouldnt that be nifty

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We may see a return of the Drachma. I think there are some clear benefits to a monetary union between countries which have very similar work ethics and similar enough industrial cultures. Like, stick Germany, the Benelux, and Austria together, no problem. Another currency for Spain, Portugal, and Southern Italy - no sweat. Imagine instead of a Eurozone, a Lirazona. Actually that sounds more like a dessert.

 

But I suppose, you get it down to few enough countries and there's almost no point in not just having your own currency. The best benefit I see for a country like Greece in remaining in any given currency bloc is that, they have just 11 million people - and it sure is probably nice to unload or share the burden of operating a mint and press, counter-counterfeicy operations, and the like. On the other hand... it's not like the Euro has done them a big favor.

 

_

 

As far as what the Swiss have done - they kept their sovereignty instead of joining the Euro and they were pretty wise to have done so; but they ran into a problem.

 

Their currency was actually honestly backed up by gold and other treasure, as well as a relatively sane fiscal policy. So people from all over the world invested in it... the Euro and the $Dollar are both fiat currencies though; they are not hard currencies, and in fact the governments can (and do) simply print more. This made the Swiss Franc go way up in value as compared to other currencies. I would argue it's good to have a somewhat strong dollar/franc/whatever... but their Franc got "too strong" if you will: it caused Swiss Exports to cost a lot of money in other countries. That's a simplistic view but still basically the essence of it.

 

So to solve that problem they artificially locked their Swiss Franc to be valued at 1.20 Euros. This was to protect Swiss Exports (to help them stay competitively priced), as well as to do some other things like prevent price shock to tourists, give a reliable exchange rate for investors, etc. How do you artificially lock the value of your currency relative to another one though? With Europe printing more money and Euros devaluing all the time... to make sure "Franc is worth 1.20 Euro" the Swiss Bank had to keep buying lots of Euros. Switzerland owns a whole lot of euros.

 

Now Europe is primed to to another massive debasement of its currency. Which has, essentially, caused Switzerland to give up its futile effort... it's not going to buy billions and billions of euros again. So they un-pinned the Swiss Franc from the Euro. They cancelled the artificial "1 Swiss Franc = €1.20". And it immediately sent the value of the Swiss Franc soaring. Some investment firms and traders who had floated other currency investments by means of paying with Swiss Francs lost a lot of money. People who invested in Switzerland by means of Euros or Dollars lost money. People who were holding Swiss Francs as investments gained a lot of money - but there weren't a lot of those people since there was confidence that a franc would always be equivalent to 1.20 euros and euro was the bigger market to invest in (so essentially, why invest in Francs directly?). The move came on kind of suddenly and it probably had to.

 

The net effect for most of us: Things at the store that say "Made in Switzerland" will cost more, and it will cost more to go on vacation and buy things in Switzerland. It will be interesting to see how investment in the Franc shakes out now; it's a relatively hard currency that's no longer pegged to a mostly fiat one. I think it will be more surprising and stark to Euro users who live near Switzerland, who will go there and discover that their money is barely worth a hill of beans anymore.

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Their currency was actually honestly backed up by gold and other treasure, as well as a relatively sane fiscal policy. So people from all over the world invested in it... the Euro and the $Dollar are both fiat currencies though; they are not hard currencies, and in fact the governments can (and do) simply print more. This made the Swiss Franc go way up in value as compared to other currencies. I would argue it's good to have a somewhat strong dollar/franc/whatever... but their Franc got "too strong" if you will: it caused Swiss Exports to cost a lot of money in other countries. That's a simplistic view but still basically the essence of it.

 

Most of your post is correct, but this bit isn't. The Swiss Franc is a fiat currency like any other, and the SNB can print up as much or as little as it likes on a whim. They terminated their gold peg fairly recently (late 90's IIRC), much later than the rest of the world, and as a result they still hold quite a bit of gold- my back-of-the-envelope calculation suggests around 8.8 cents worth of gold per dollar of GDP, versus the US's 2.4 cents and the world average of 2.8 cents. Still, that's a far cry from "backed by gold".

 

Fundamentally Switzerland's problem is that they're a net exporter despite a strong currency- which means that when the rest of the world is in trouble, your currency shoots up in value and people stop buying your stuff, meaning you're in trouble now, too. By contrast, the US also has a strong currency, but we're a net importer, so when the rest of the world is in trouble we just get to buy our stuff cheaper. This isn't an easy problem to fix without either permanently wrecking your currency or seriously damaging your domestic economy. I don't envy the SNB's job.

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Okay I misunderstood a little; no actual gold backing on the Swiss Franc. The Swiss do own a lot of hard assets and have, compared to Europe or America, pretty sane fiscal management. Which ironically enough, lends them a disadvantage. Which begs the question - how sane is sane management?

 

With about 8 million people they don't have the luxury of being able to go trillions into debt. If they just print more francs to relieve some upward pressure on its value - well if that were the plan, why not do it and stay pegged to the Euro? So I don't think that's what we're looking at. I'm not sure they have the industrial size to do what Germany did either, in admitting that they are going to have a high currency, and just focusing on quality and efficiency. Of course I have not done a great deal of research into the Swiss economy.

 

It will be interesting to see how the Swiss and the SNB handles all of this in the coming months - and whether there's a massive sell-off of Euros by them. On one hand it may be prudent for them to diversify before the Euro drops lower, and get Dollars, maybe Yuan. On the other hand, selling massive amounts of Euros may exacerbate their local problem.

 

To me what's interesting, and I may be wrong in this line of thinking, is that because the Swiss never actually joined the Euro (even though they artificially did), they are able to pull out of it... while others, say the Dutch for instance, are basically forced to eat whatever happens to the Euro with no recourse. If a relatively wealthy Swiss people are saying they can't afford it anymore, what must people in obligate contributor nations be feeling?

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  • 2 weeks later...

Well, the first shots have been fired on each side. Greece's plan is to convert around 10% of their debt into interest-only perpetual bonds, another 40% into GDP warrants that only pay interest if the country is growing at a certain rate, and leave the remaining 50% as-is. The ECB has countered by eliminating their waiver and is now refusing to accept Greek government debt as lending collateral, meaning that if Greek banks wish to borrow from them, they must do so via unsecured loans charging 1.55% instead of secured loans at 0.05%.

 

Both of these moves seem quite reasonable- perpetual financing was a staple of high-debt governments like Britain, and they managed to come out fine; and I certainly wouldn't feel comfortable lending somebody money for free with only Greek bonds as collateral. Events are obviously still developing, but it's looking like both sides are tying quite hard to not blow up Europe only to reach an agreement at the last possible second like they did in 2011. Good job everyone, you both win round 1.

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