I can’t remember where I read this now, and searching for it the only places where it is mentioned are in the comments of the Spectator magazine and ZeroHedge. It may not actually be true then.
Such a programme would have been one of the first things to be cut when Greece realised it was slipping into a debt crisis anyway. Greek bureaucrat back in 2008 - “What we’re paying heaps of Euros to stockpile a possible alternative currency for the remote contingency of us leaving the Euro? Cut that from the departmental budget immediately!”
And with good reason. Once it’s accepted that a country can leave the Euro and devalue, all the smart money gets out of Italy, Spain, Ireland… really, everywhere else, and into German banks.
Another crisis week is upon Greece:
The “major bond holders” are the Institute of International Finance (IIF), which by some estimates holds 40-45% of Greek bonds. Their support is no surprise, given that they helped draw up the deal.
By Thursday, Greece needs at least 75% of their bondholders to agree to the haircut for the deal to take effect (with that margin, they can effectively force the holdouts to accept a writedown). The IIC move is a play to build momentum toward that goal among the other investors.
No need to worry, ISDA has ruled that Greece isn’t in default yet (and thus outstanding CDS’s on Greek debt can’t be collected on). Thereby proving that Credit Default Swaps aren’t pure gambles, they’re rigged .
I agree; it seems their only useful purpose is to game investment ratings: Kick in a few bucks for a CDS and you’re investment–no matter how wobbly–gets AAA. Never mind that there’s a substantial chance that CDS will never be paid…
Can you explain to an economic simpleton how this works?
Hoo boy, I wish I could explain the whole thing. Currency exchanges are grotesuqely complicated and I do not claim to be an expert. However, the basics are pretty simple.
Super short version: the price of a single Euro is based on the averaged demand for all currency in the entire Eurozone, which includes countries way poorer than Germany. Like, all of them. (Some are actually a little richer. But they’re less populous and they don’t have as much impact.)
Short version:
First, understand all this is relative and partly imaginary. There’s no “true value” of any currency. Not the dollar, euro, yen, or renmimbi. Also, relative currencies tend to have a region around which they are stable. The Yen roughly equates to a penny, and a Dollar is about 70 Euro-cents. That doesn’t really mean anything in the currency world, however: you could have a very strange nation where all the wealth of everybody together equalled only one MegaMillionBuck, and everybody traded in micro-pennies or some nonsense. READ: The numbers don’t matter as much as the relative change or stability over time.
Essentially, almost every currency is on the “float,” which means its value changes depending on how many people are buying or selling. That’s why the Dollar can be up against the Yen one week and down the next. When your currency is riding high, it means everybody wants it. If everybody wants it, they are literally bidding up the price of (say) Dollars. This means you can buy more overseas goods for your cash. It also means it’s more expensive for those people to buy your goods when you want to export.
The backend is mostly handled by banks dealing in umpteen millions of dollars and euros and yen and whatever every day. You don’t have to worry about this, but just understand there is an actual market where people buy and sell money.
This is theoretically self-balancing. As you sell more, people buy more of your currency. As they buy more, it becomes more expensive. As it becomes more expensive, they buy less. As it becomes cheaper, your goods are more desireable…
America might actually be a little too large for a single currency to be optimally efficient. However, things are simplified a lot because we all grew up on it, so to speak. We’ve had a unified currency since our economy was in its infancy, and so it didn’t particularly hurt. Likewise, when we introduced the national currency, it took place in a far more flexible international system, where gold and silver freely traded around the world, and bankntoes were often accepted as local currency. So bringing people onboard was a far less troublesome prospect. Likewise, no state in the union is that different from any other, except maybe Alaska and Hawaii. They all have similar government, culture, and a diverse economic base - even Alaska and Hawaii. And for the most part they’ve avoided fiscal disasters in the past and so have a pretty solid financial track record.
Now, enter the Euro.
They put in place a currency union and got exactly same damn thing which happened in East Germany, for more or less the same damn reasons, just at a slower pace.
The Euro is a float. But it’s being floated across vastly disparate economic regions. Southern Europe mostly had cheaper currencies beforehand, while northern European countries had more expensive currencies. However, once they were all stuck together, the float averaged out for the whole zone. Northern European countries dragged the price up, and sourthern dragged it down.
The thing is, it’s often very advantageous to have a cheap currency. It means you sell exports like gangbusters, and Germany already had a heavily export-oriented economy. So they ramped up and kept ramping up. Normally, this might have meant the curency would get more expensive… but the effect gets averaged over the entire Eurozone. So Germany just kept selling and kept hiring. There is a downside to the average german, in that they pay more for imports. However, they’ve got a lot of currency to pay the extra, and in any case there’s a lot to be said for a very steady income stream.
Meanwhile, expensive currencies are nice for imports, but that assumes you have the financial wherewithall to do so. Good for maybe the United States, but tough on Greece. Worse yet, southern Europe needs to sell exports much more than northern Europe. However, their currency became more expensive with the Euro, and they don’t have any way to discount it. As their economies get poorer and poorer, nothing much happens to the Euro because the effect is - you guessed it - being averaged over the entire Eurozone.
That’s why it’s so pernicious. It becomes a vicious circle, because once you get on the short end of the stick, it becomes harder and harder to improve. You lose your exports, and while your currency became more valuable, you have fewer and fewer workers able to buy anyway. But since your currency doesn’t drop, you can’t attract foreign business that way, but you won’t have the money to suddenly make huge productivity gains.
Hence the huge political arguement. The Greeks do have a lot of problems. On the other hand, some of the worst are not their own making. Likewise, the Germans are being pigheaded and selfish. On the other hand, they took a good hand and played it well with a lot of hard work. Nobody’s evil here (except for some commissioners who keep grabbing power away from democracies) but that doesn’t mean the problem can be solved in the current system.
That’s the short explanation, and I skipped a lot nits I’m sure other posters will pick. The long version takes a book, and the very long version is archived on DVD’s.
Basically, it’s fiendishly complicated and devilishly hard to predict, just as with most complex systems. In this case, it’s working against an awful lot of people.
I’m an economic simpleton too but here’s my take on the situation.
Imagine there are opnly two countries, A&B with floating exchange rates. If A exports a lot to B, B will have to pay in A$, selling B$ to buy A$. This causes A$ to go up in value. Eventually A$ will be so much higher than B$ that B’s exports will be comparatively cheap and so B’s exports to A will rise, ultimately balancing things out.
But as Germany is in the Euro that can’t happen with respect to Germany’s exports to other Eurozone countries. They all have the same currency so no rebalancing of exchange rates can happen. The result is as smiling bandit points out: Germany’s exports are priced in Euros. There is no floating rate within the Eurozone, so other Eurozone countries who buy a lot of German imports have their own manufacturing sectors crushed - why pay 1,000 Euros for a Greek-built fridge when a much better German one is the same price?