EU AND THE DOLLAR

The world is trying to make sense out of the misery of the euro. Yesterday’s darling new currency is predicted to be the stepchild of the US dollar. Sunday’s New York Times asked “Is Greece’s debt trashing the Euro?” This question perhaps has been in many people’s minds. Up to last year, Greece’s economy was performing much better than those of other EU members or the SE European countries, with the possible exception of Turkey, which, after the pro-market reforms refused to stop for even a short interval. When it comes to reforms, Greece and Turkey moved in opposite direction one increasing the reliance on the state while the other accepted the market forces as a necessary evil.

On January 24, 2010, the New York Times quoted George Economou “a Greek shipping magnate” saying that “the Italians, the Spaniards, the Greeks, we all have been living in happy land, spending what we did not have. It was a fantasy world.” Like all real life fantasies, awaking will come sooner or later. The “so-called” socialist governments of Greece, Spain, and Portugal played a fundamental role in the creation of the make-believe fantasy of spending a limited resource as if there would be an unlimited stream of new growth in the future. Make-believe worlds create illusions of richness that a reality appears as a nightmare.

There was a productivity slow-down in Greece, an above-normal level inflationary pressure and increased unrest in the markets. The labor market remained as if the economy was operating in the 1960s. Massive illegal immigration of unskilled labor failed to create competitive conditions in Greek labor markets. The Italians, the Spaniards and the Portuguese, the poor of the euro-zone, had to wake-up. Now the Spaniards blame the international media for the crisis. The Financial Times reports from Spain that a senior minister blamed foreign economic commentators for this crisis. There is no doubt that the speed of news transmission may create a short-term disturbance in the market, but this crisis is more the by-product of the luck of central authorities to take action through spending, taxation, and intervention.

Like his Greek counterpart, the Spanish Finance minister has promised to bring the fiscal deficit to 3% of the GDP by 2013, but the markets did not believe him or his Greek counterpart. According to CMA DataVision, the spread on five-year Portuguese credit default swaps rose from 227bp late Friday to 244.06bp yesterday. The five-year Spanish CDS spread rose from 166.5 to 172.9bp. And the Greek CDS spread widened further, from 407 to 426. By the way, as soon as Germany announced it would come to the assistance of the Greek problem, the spread narrowed. Meanwhile, according to Les Echos, French labor leaders warned France not to use the crisis for austerity measures. The French will follow the road blockades and strikes that Greeks love so much.

 

Will EU survive this crisis? Yes, indeed. However the dollar exchange-rate of the euro cannot be what we experienced in 2008, unless President Obama and fed Chairman Bernanke make the dollar the drachma of the 1940s. In today’s world a negative real interest rate kills accumulation and growth. When money markets become uncertain, the dollar becomes the international currency.

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Lefteris N. Botsas, Ph.D.
Professor Emeritus
Oakland University
Rochester, Michigan, USA
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