Saturday, May 22, 2010


European leaders are totally focused on Euro when looking at it from the outside. The Euro is currently at an exchange rate quite similar to what we have already seen before quite a few times. Back then they didn't feel that Euroland was collapsing. Now they do.

In graph 1 we calculated a relative strength indicator for major world currencies. We used the US Dollar as measuring rod. A logical choice, because the Americans are the only major nation not to worry too much about currency values. The export-import percentage in their economy is relatively low and they are also still the world's number one safe haven currency. No need to worry. A low or high dollar value is a problem for the others, not them. At least: that is how the world used to be before the creation / development of power blocks that could question the leading position of the USD.

Graph 1; Relative Strenght Major Currencies vs USD

(1994/12 = 1; cumulative monthly currency appreciation/depreciation added)

Starting with an index value of 1.0 in December 1994 (i.e. NOT the exchange rate value of USD versus Euro / ECU and that is why we see that the peek is not at the 1.50-1.60 levels reached in 2008) we see that three out of four major Emerging Markets see their currency value collapse quickly afterward during the currency crisis period in Emerging Markets (1998). But it did not lead to the collapse of their countries. Actually: during the next 12 years all three of them have used the low values in export markets. From a currency perspective China is the strongest country. The shape of its line seems to indicate clearly that this is an orchestrated currency: pegged to the dollar when useful, and appreciated when 'necessary'.

At the moment Europe is afraid of the Euro, but the graph indicates that the relative strength levels reached are nothing special. What is special is more European short-sightedness after the crisis. The correlation between Pound Sterling and Euro during the last period is remarkable, albeit that the Europeans panicked in the Greek crisis whereas the Brits - more used to volatile exchange rate movements of the Pound focused on other things.

When going through European newspapers or analyses and watching leading politicians or scholars we hear almost no word about the fact that a Euro of 1.50-1.60 versus the Dollar is probably far worse because of its negative impact on exports. True, Germans are always the financial champions within Europe when it comes to discipline. But isn't a stronger Dollar at the moment something that is of more importance to the US and other competitors in global export markets?

And when in Europe, be it within Euroland in for instance the Netherlands or just outside of it in the UK, we see that national election campaigns aren't even mainly focused on the Euro or even Euroland. True, some parties want to create cost savings by reducing Europe-related spending, but the bulk of post-crisis behavior and political strategy seems to be focused on NATIONAL as opposed to INTERNATIONAL themes. With 'the economy' theme nr 1.

The old American adage 'It is the economy stupid' brought the Conservatives its electoral success in the UK and it seems to go the same way in the Netherlands. The liberals of the VVD - probably by international standards more a conservative party - benefit from this.

In and of itself nothing wrong with 'economy' being a major theme after a crisis. But it is sad that post-crisis periods are always characterized by loss of PERSPECTIVE. Behavioral studies have indicated this. Not real risks, but perceived risks are key. And that leads to a focus on perceived problems.

I am not saying that the Economy is a perceived problem in-and-of-itself in a post-crisis period. But just like moles we are digging in, focusing on our small little world around us. Money was withdrawn from markets further away, like in this case Emerging Countries. But they were actually not the ones with the big problems. The big problems were concentrated in the Western world's financial sector.

In sheer panic we bailed them out to such an extent that Financial Services is actually one of the industries showing nice growth figures in 2009-2010 compared to the crisis years. No wonder the anti-bonus lobby is gaining ground.

The new Obama regulation that wants to ensure that Financial Institutions can not trade for their own book as much as they used to do when their client-related business grows is excellent. Bankers weren't real entrepreneurs or traders. They were using client portfolios as liquidity to play with. And that does obviously create a casino where players get their chips for almost free. And when the downside risk is that it could cost you ''only'' 100 percent of your salary, whereas the upside potential is thousands of percents of that (since your portfolio base is so large now that client money is involved in the games as well!), no wonder that things went out of hand.

Let's hope that leaders will get things in the right PERSPECTIVE now. But we are worried and believe they won't. Financial Services specialists and leaders have become grand masters in suggesting that 'they are a different industry'. And that risk in their sector is about risk for society as a whole. But of course it isn't. The economy of developed nations consists of many sectors. And true, the financial infrastructure of countries is important for smooth economic progress in other industries as well. But so is the food industry. Without a smooth food industry employees might get hungry and become less productive when hunger eats away their strengths.

The right PERSPECTIVE in smaller countries (The Netherlands definitely in their elections and maybe even the UK) is that a Global Crisis is something Global. A national election campaign that seems to focus on what did WE do wrong or right etc and that seems to forget the impact of simple correlations with world factors in an open economy and society creates a feeling of control that won't be there. The new governments in the UK and the Netherlands might be better than the previous ones, but in both cases we can already predict that a lot of what they promise their voters won't happen. Not even the things that political parties in the Netherlands had officially analyzed and calculated by the Central Planning Bureau (CPB). The models of CPB are better in analyzing ex-post than ex-ante.

And ex-post was a period in which 'we', Europe and the US dominated. But that time is gone. Thirty to Fourty percent of world GDP and an even larger share of growth momentum stems from Emerging Markets. The World is Changing, and as long as we don't see it and concentrate time and again on 'small' local issues whenever we are in panic, solutions won't come.

Plans to solve the Global Crisis should of course be created internationally and of course Obama and his team can take a leading role with Europe a good second (but unfortunately there is no real Europe but just a bunch of smaller countries of which only Germany seems to take things serious in an international setting, which is no surprise because of its export machinery), long as the BRIC nations and the Middle Eastern energy producers are not given a more prominent role all solutions will be nothing more but medicines that provide some short-term pain relief.


But when analyzing history we see that it is characteristic of any leading power. When advantageous positions vanish, the one holding the advantages always sees it later than the runners-up sense that things are changing.

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