Opinion / Columnist
Zim offers a lesson that can rescue Europe from its Eurozone financial imbroglio
18 Nov 2011 at 10:39hrs | Views
Adoption of the single currency by certain European countries (i.e. Eurozone members) brought into convergence hitherto disparate sovereigns whose economies were as different as day and night.
The conglomeration of these economies brought into sharp focus their idiosyncratic individual economies. The central fulcrum around which the Euro was formulated was the "no bailout" clause. In other words, any member country that fell into financial quagmire had to stagger and pull itself out of the mud without being bailed out by other members.
The term "bailout" was considered omenous and taboo. It was almost unthinkable that a member of that supposedly esteem group could one day find itself in the doldrums. Moreover, it was emphasised that joining the Eurozone was an irreversible exercise. Countries had to give up their national currencies in favour of the Euro. This seemed to be a natural consequence of the globalisation process which was being catalysed by the rapid technological advancement and ease of communication.
Initially, it all seemed honky dory with countries like Greece going into extreme debt binges, borrowing wantonly in the money and capital markets with reckless abandon in the name of being members of the mighty Eurozone group of sovereigns. When the music stopped playing, i.e. when the crisis set in, the European governments began to look deeper into the bespoke financial affairs of member countries, some of which were being severely afflicted by the looming debt crisis.
It was discovered that Greece had falsified its GDP numbers by in order to gain entry into the Eurozone. Greece had alleged that it had discovered huge revenues that had not been added into its national statistics adding that it had discovered significant revenues from "gambling and prostitution" that had not been included in its GDP. The later day revelation that Greece had in fact provided dubious statistics sent the Greek economy into a tailspin with its financial position spiralling from bad to worse. Its cost of borrowing skyrocketed, its credit default swap spreads breaching the hitherto unimaginable figure of 1000 basis points (i.e. cost of insuring against default by Greece). This figure has since ballooned to over 2000 basis points. Other weaker Eurozone members were dragged kicking and screaming into the fray. The credit profiles of the likes of Italy, Spain, Ireland and Portugal became synonymous with that of Greece. The markets fearing possible contagion and systemic risk, could not distinguish who is who among these peripheral Eurozone countries.
Against this background, the question which arises is: what is wrong with the single currency? Why are members of this single currency the only ones bearing the brunt of the debt crisis? The answer is that there is the question of asymmetry within the Eurozone. On the one hand, Germany and other stable sovereigns want to restrict money supply while the debt-stricken ones like Greece urgently need money for their survival. This has given rise to a dichotomous scenario, an asymmetry scenario.
Germany of course, like Zimbabwe recently, experienced catastrophic hyperinflation during the second world war and is therefore always and everywhere dogmatically opposed to any monetary policy relaxation. Germany law makers are very skeptical of the central banks' so-called quantitative easing (i.e. euphemism for printing excess money). In a nutshell, members of a single monetary union cannot independently print their own money to finance their debts and other national obligations. This can only be done by the European Central Bank. This then has the unwitting or witting effect of condemning such sovereigns to the brink of abyss and oblivion.
If such countries had their own national currencies, then it would have been easy for them to extricate themselves out of debt via the printing press. On the other hand, if the printing press is left in the hands of a reckless monetary regime, this could have dangerous hyperinflation- inducing repercussions (e.g. Zimbabwe recently). Notwithstanding the presence of the "no bailout" clause within the European constitution, other Eurozone sovereigns had no option but to pool resources together and bailout the strife-torn peripheral Eurozone sovereigns like Ireland, Portugal and Greece. If these sovereigns were not bailed out, the catastrophic effects of the so-called "known unknown" would have been too scary to contemplate. The effects of any default tends to have "known" consequences of financial losses to the banking industry in particular. But the contagion and systemic effect of defaults to the overall financial industry is "unknown". Against this backdrop, the bailout of the likes of Greece became a priority. Any delay in its implementation would have savaged and battered the whole banking industry sending many banking groups into oblivion.
From the foregoing, new questions tend to arise: Did the European countries make misconceived ill-judgements by adopting the single currency? Were these countries wise to decommission their own currencies in favour of the Euro? Would it not have been better for them to denationalise their currencies and use them simultaneously and severally across their borders without any restrictions? Could it be that they were afraid of inflation that could be caused by reckless members excessively printing money in their respective economies? Shouldn't they have adopted a multicurrency system, i.e. invariably using currencies of all member countries without restrictions? After all is the freedom of choice not what capitalism is all about, i.e. freedom of choice even on currencies?
It is curious and interesting to note that to answer the aforementioned questions, Zimbabwe seems to offer a perfect microcosm or case study of what the Eurozone could have done. On this, it is noteworthy that Zimbabwe is peerless in the drive towards the implementation of multicurrency system in an orderly and systematic manner. Zimbabwe's adoption of the multicurrency system (simultaneous and several use of numerous currencies) offers an elaborate example of what the Eurozone could have done.
They should have adopted currencies of their individual members and allowed them to function freely and rank parri passu in the markets while allowing market forces to dictate their valuations so that errant members who print excessive money could be punished by the "invisible hand". Had this happened in Europe, the likes of Greece and Italy would not have been allowed by the markets to borrow beyond their means. Moreover, the multicurrency system as applied in Zimbabwe has shown that it is the best way to control inflation.
Zimbabwe today probably has the lowest inflation rate in the world. Because inflation is always and everywhere a monetary phenomenon caused by excessive money supply, in a typical multicurrency system (as in Zimbabwe) the markets will quickly sense any currency that is being excessively supplied and consumers will reject it out-rightly with contempt.
It is perhaps curious that Zimbabwe is currently being used by leading advocates of multicurrency systems as a living proof that the system does work. A number of economists also use Zimbabwe as a reference point for their theories on the benefits of multicurrency systems. One such economist is Prof Steve Hanke of Johns Hopkins University in the US. Current Republican US presidential candidate, Congressman Ron Paul, who has been a perennial critic of the US Federal Reserve System (advocating for its dissolution) uses Zimbabwe as an example of a sovereign country that has no central bank that prints money or implements monetary policy. The Reserve Bank of Zimbabwe serves as a de jure central, but de facto, there is no central bank that prints money and conducts monetary policy.
In the 1970s, Nobel-prize winning Austrian economist Prof FA Von Hayek argued persuasively for the freedom of currency choice and denationalisation of money. He argued that the doctrine of free markets theory should be extended to the freedom of choice on currencies. It is a tribute to Prof Hayek that Zimbabwe's former acting finance minister, Mr Patrick Chinamasa introduced the multicurrency system and also outlawed the system of exchange controls as well as price controls. This is one area where Zimbabwe can lead the world notwithstanding its numerous other self-inflicted problems. In Zimbabwe, the multicurrency system has worked wonders in terms of curbing inflation and stabilising the economy.
In conclusion, Europe should learn from the likes of Zimbabwe and rather adopt the multicurrency monetary system. The Eurozone will remain a very unstable and dangerous (to the financial system) group of countries for ages and the markets will never trust this single currency union in our lifetime. As for Zimbabwe, it has something that works and it must keep it and offer its hare-brained financial expertise to the world , particularly Europe.
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Colls Ndlovu is an independent financial analyst and can be contacted on wabayi@hotmail.com
The conglomeration of these economies brought into sharp focus their idiosyncratic individual economies. The central fulcrum around which the Euro was formulated was the "no bailout" clause. In other words, any member country that fell into financial quagmire had to stagger and pull itself out of the mud without being bailed out by other members.
The term "bailout" was considered omenous and taboo. It was almost unthinkable that a member of that supposedly esteem group could one day find itself in the doldrums. Moreover, it was emphasised that joining the Eurozone was an irreversible exercise. Countries had to give up their national currencies in favour of the Euro. This seemed to be a natural consequence of the globalisation process which was being catalysed by the rapid technological advancement and ease of communication.
Initially, it all seemed honky dory with countries like Greece going into extreme debt binges, borrowing wantonly in the money and capital markets with reckless abandon in the name of being members of the mighty Eurozone group of sovereigns. When the music stopped playing, i.e. when the crisis set in, the European governments began to look deeper into the bespoke financial affairs of member countries, some of which were being severely afflicted by the looming debt crisis.
It was discovered that Greece had falsified its GDP numbers by in order to gain entry into the Eurozone. Greece had alleged that it had discovered huge revenues that had not been added into its national statistics adding that it had discovered significant revenues from "gambling and prostitution" that had not been included in its GDP. The later day revelation that Greece had in fact provided dubious statistics sent the Greek economy into a tailspin with its financial position spiralling from bad to worse. Its cost of borrowing skyrocketed, its credit default swap spreads breaching the hitherto unimaginable figure of 1000 basis points (i.e. cost of insuring against default by Greece). This figure has since ballooned to over 2000 basis points. Other weaker Eurozone members were dragged kicking and screaming into the fray. The credit profiles of the likes of Italy, Spain, Ireland and Portugal became synonymous with that of Greece. The markets fearing possible contagion and systemic risk, could not distinguish who is who among these peripheral Eurozone countries.
Against this background, the question which arises is: what is wrong with the single currency? Why are members of this single currency the only ones bearing the brunt of the debt crisis? The answer is that there is the question of asymmetry within the Eurozone. On the one hand, Germany and other stable sovereigns want to restrict money supply while the debt-stricken ones like Greece urgently need money for their survival. This has given rise to a dichotomous scenario, an asymmetry scenario.
Germany of course, like Zimbabwe recently, experienced catastrophic hyperinflation during the second world war and is therefore always and everywhere dogmatically opposed to any monetary policy relaxation. Germany law makers are very skeptical of the central banks' so-called quantitative easing (i.e. euphemism for printing excess money). In a nutshell, members of a single monetary union cannot independently print their own money to finance their debts and other national obligations. This can only be done by the European Central Bank. This then has the unwitting or witting effect of condemning such sovereigns to the brink of abyss and oblivion.
If such countries had their own national currencies, then it would have been easy for them to extricate themselves out of debt via the printing press. On the other hand, if the printing press is left in the hands of a reckless monetary regime, this could have dangerous hyperinflation- inducing repercussions (e.g. Zimbabwe recently). Notwithstanding the presence of the "no bailout" clause within the European constitution, other Eurozone sovereigns had no option but to pool resources together and bailout the strife-torn peripheral Eurozone sovereigns like Ireland, Portugal and Greece. If these sovereigns were not bailed out, the catastrophic effects of the so-called "known unknown" would have been too scary to contemplate. The effects of any default tends to have "known" consequences of financial losses to the banking industry in particular. But the contagion and systemic effect of defaults to the overall financial industry is "unknown". Against this backdrop, the bailout of the likes of Greece became a priority. Any delay in its implementation would have savaged and battered the whole banking industry sending many banking groups into oblivion.
From the foregoing, new questions tend to arise: Did the European countries make misconceived ill-judgements by adopting the single currency? Were these countries wise to decommission their own currencies in favour of the Euro? Would it not have been better for them to denationalise their currencies and use them simultaneously and severally across their borders without any restrictions? Could it be that they were afraid of inflation that could be caused by reckless members excessively printing money in their respective economies? Shouldn't they have adopted a multicurrency system, i.e. invariably using currencies of all member countries without restrictions? After all is the freedom of choice not what capitalism is all about, i.e. freedom of choice even on currencies?
It is curious and interesting to note that to answer the aforementioned questions, Zimbabwe seems to offer a perfect microcosm or case study of what the Eurozone could have done. On this, it is noteworthy that Zimbabwe is peerless in the drive towards the implementation of multicurrency system in an orderly and systematic manner. Zimbabwe's adoption of the multicurrency system (simultaneous and several use of numerous currencies) offers an elaborate example of what the Eurozone could have done.
They should have adopted currencies of their individual members and allowed them to function freely and rank parri passu in the markets while allowing market forces to dictate their valuations so that errant members who print excessive money could be punished by the "invisible hand". Had this happened in Europe, the likes of Greece and Italy would not have been allowed by the markets to borrow beyond their means. Moreover, the multicurrency system as applied in Zimbabwe has shown that it is the best way to control inflation.
Zimbabwe today probably has the lowest inflation rate in the world. Because inflation is always and everywhere a monetary phenomenon caused by excessive money supply, in a typical multicurrency system (as in Zimbabwe) the markets will quickly sense any currency that is being excessively supplied and consumers will reject it out-rightly with contempt.
It is perhaps curious that Zimbabwe is currently being used by leading advocates of multicurrency systems as a living proof that the system does work. A number of economists also use Zimbabwe as a reference point for their theories on the benefits of multicurrency systems. One such economist is Prof Steve Hanke of Johns Hopkins University in the US. Current Republican US presidential candidate, Congressman Ron Paul, who has been a perennial critic of the US Federal Reserve System (advocating for its dissolution) uses Zimbabwe as an example of a sovereign country that has no central bank that prints money or implements monetary policy. The Reserve Bank of Zimbabwe serves as a de jure central, but de facto, there is no central bank that prints money and conducts monetary policy.
In the 1970s, Nobel-prize winning Austrian economist Prof FA Von Hayek argued persuasively for the freedom of currency choice and denationalisation of money. He argued that the doctrine of free markets theory should be extended to the freedom of choice on currencies. It is a tribute to Prof Hayek that Zimbabwe's former acting finance minister, Mr Patrick Chinamasa introduced the multicurrency system and also outlawed the system of exchange controls as well as price controls. This is one area where Zimbabwe can lead the world notwithstanding its numerous other self-inflicted problems. In Zimbabwe, the multicurrency system has worked wonders in terms of curbing inflation and stabilising the economy.
In conclusion, Europe should learn from the likes of Zimbabwe and rather adopt the multicurrency monetary system. The Eurozone will remain a very unstable and dangerous (to the financial system) group of countries for ages and the markets will never trust this single currency union in our lifetime. As for Zimbabwe, it has something that works and it must keep it and offer its hare-brained financial expertise to the world , particularly Europe.
----------------------
Colls Ndlovu is an independent financial analyst and can be contacted on wabayi@hotmail.com
Source - Colls Ndlovu
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