There is a lot of very important news out there today, but perhaps nothing is really more important than this:
The completely unexpected decision of the Swiss National Bank (SNB) to remove the 1.20 floor on the Swiss franc against the euro [last week] was one of the biggest currency shocks since the collapse of the Bretton Woods system in 1971.
Then yesterday, the Danish central bank “cut its interest rates to dampen investor interest in the Danish krone ahead of a closely watched European Central Bank meeting Thursday.” The Wall Street Journal quotes an analyst’s opinion:
“This is all part of the currency war in which the ECB has become a big player last week. The weakness of the euro became too much for them. On the back of the SNB move, there was speculation that the eurodenmark peg could come under speculative pressure. Obvious difference is that Denmark does not have to cope with safe-haven flows, like the SNB does. There is not the same degree of pressure than on Swiss. Another difference is that the krone is not overvalued by many measures.”
Honestly, my knowledge of the situation is too meager to be able to say what this means, but it is possible — I emphasize, merely possible — that this is one of those signs of an impending economic crisis. The underperforming European economies (PIGS = Portugal, Italy, Greece and Spain) have been a drag on the Euro for several years, dependent on the ability of the stronger economies (especially Germany) to patch up the related currency problems. But these were always patchwork fixes, and the underlying problems are too deep to be permanently fixed, no matter how much cash the Germans could provide, no matter how strict the austerity measures imposed on the fiscally disastrous Mediterranean governments.
Maybe the ECB will be able to find another patch, but if the Swiss and Danes are hedging their bets . . .? I don’t know what this means, but if I were a major investor, I might be worried. Any readers with extensive knowledge of the European financial situation are invited to offer their analysis in the comments.
(via Memeorandum.)
I have some familiarity with this, and I can say there are a lot of Germans (and northern Europeans, as well) who have been unhappy with the Euro since it was foisted upon them. The best analogy is running a very fiscally prudent, conservative household and then being compelled to allow your profligate neighbors unfettered access to your American Express card. There was a reason the drachma and the lira were crap compared to the Deutschmark or the Swiss Franc. Now, Greek and Italian Euros have the same purchasing power in Germany or Finland.
Switzerland, and to a lesser extent Denmark, are trying to prevent the PIGS from moving their Euros into their countries and diluting the value of what’s produced therein. Think, Mexico having the right to print U.S. dollars without restriction. The move by the Swiss National bank will make francs more expensive for Euro holders and stop the purchase of francs from Euro countries who fear a collapse.
The SNB move was simply abandoning an unsustainable policy of propping up the EURO against the Swiss franc. Now their exports will become more expensive as their currency rises in value against the EURO.
The question never was “When will Greece exit the Euro?” rather it is “When will Germany exit the Euro?”. Get ready for a full scale panic in Europe.
True. But it also prevents the massive influx of inflated Euros into Switzerland from the PIGS which are used to, inter alia, buy up Swiss assets for chump change. The Germans have the same problem, but their leaders are/were the driving force behind a currency union, so they have no one but themselves to blame.
Actually, the (west) German people didn’t particularly want the Euro. It was foisted upon them by their leadership. Sadly, Germany is still waiting for its own Nigel Farage.
”Importing” EUROs was the unsustainable part of their ”peg” policy.
Prophecy From Five Years Ago.
I suspect the true endgame was to eliminate national banks entirely and move to a single “European Bank” headquartered in Brussels. Alas, the nationalistic greed and envy of the southern Europeans prevented that initially, and their recalcitrance will bring the Euro experiment to an end.
Think Cyprus, but on a grand scale, followed by incredible turmoil.
We say that the Jews are the “Canary in the coal mine” regarding the political health of a nation. The Swiss are such regarding economic matters.
You nailed it by noting the PIGS. the Europeans have been living beyond the means justified by their production for years and years and years, and it has caught up to the weaker economies.
The presence of the unified currency is all that has prevented Greece from going the way of Zimbabwe, with it’s $100 Trillion bank notes; the French and Germans had to prop up Greece, but it won’t be that long before their citizens say, “Sacre bleu! Why are we propping up the PIGS?”
I wonder if these folks will make a Euro/FRN/government currency version of this. http://youtu.be/d0nERTFo-Sk
That would be most welcome.
[…] European Economic Crisis? […]
What the rest of the continent probably needs to do is surrender to Germany now, while they are still able to negotiate from a position of relative strength.
Interesting question as I know very little about currencies. Here are some raw data that perhaps somebody can explain.
The Swiss franc (CHF) was worth in late Jan 2010 / 2011 / 2012 / 2013 / 2014 / 2015 (prior to SNB action) / today:
USD – 0.942 / 1.059 / 1.087 / 1.097 / 1.108 / 0.982 / 1.141
EUR – 0.679 / 0.773 / 0.831 / 0.809 / 0.817 / 0.817 / 0.833 / 0.989
GBP – 0.591 / 0.661 / 0.690 / 0.695 / 0.672 / 0.651 / 0.754
INR – 43.494 / 48.606 / 53.823 / 58.494 / 69.251 / 61.033 / 70.430
CNY – 6.431 / 6.995 / 6.860 / 6.828 / 6.716 / 6.093 / 7.092
In Sept, 2011, the Swiss bank introduced its franc / euro peg.
Just looking at these data, it seems to me that the Swiss were screwing themselves by pegging to the Euro: during a period when other currency values were changing relative to the franc (especially the Indian rupee, and I gather that Switzerland does quite a lot of export business in that country), the euro didn’t. Assuming that today’s exchange rates reflect actual “market value”, the franc gained OVERNIGHT 19% against the euro and about 16% against other currencies.
Interestingly, the dollar has gained A LOT on the euro in the past year. In Jan ’14, the dollar was worth about 0.74; today, it is worth 0.87, a change of about 18%. The British pound gained about 8%. Clearly, the pegging to the euro was depressing the value of the franc, which no doubt allowed people who understand these things to make some shrewdish deals at the expense of the Swiss.
If somebody else can throw more light on this, I would appreciate it.
A currency is essentially an IOU, since you can exchange it later for a future good or service; national debts count as currency, since they just make it more explicit. If the Italians want to import a lot of goods and don’t care about preserving the value of their savings, then they used to be able to issue a lot of lire IOUs. If the Germans produce lots of goods that other people want to buy want to preserve the value of their savings, then they used to be able to issue very few of their mark IOUs, so that you would have to give them a lot of your IOUs to exchange for just a few of theirs.
Different economies need different currency policies; the north/south mismatch in the euro has not been resolved because it cannot be resolved. We would have similar issues here in the U.S., except that only Nebraska has a state bank, and the Federal government has become a sufficiently large fraction of the national economy to kind of even things out between the states.
When something becomes highly desired as a store of value, then its price goes up, like what happens to gold every now and then. When that happens to a currency, it makes it cheaper for those people to buy imports, but it hurts the ones producing for export. Switzerland was trying to keep its currency from getting too expensive by buying other people’s, but that wasn’t sustainable, since eventually they would run out of reserves to do that with. If other people want their IOUs so much, it would make more sense to me if they just issued lots of national debt; then they would also have money to spend. Perhaps they just can’t think of any investments worth making.
One or two small countries allow their currency to float and it’s ‘the biggest crisis since the end of Bretton Woods’? They’re looking for eyeballs and prancing about the stage shouting in search of them.
Denmark by itself would be no big deal. Switzerland, however, thanks to its unique history and stability, has an influence in the financial world which far outweighs its size or political influence. If Costa Rica did this, no one would notice. Switzerland is a different story.
Not buying. The Swiss economy is 1/8 th the size of Russia’s, 1/5 th the size of Italy’s, and smaller than Colombia’s.
The biggest sin for the SNB was taking that depegging action without notifying anyone. The world banksters couldn’t care one way or the other, as long as they make money. But SNB PINKY-SWORE about 5 days prior that they were staying with the Euro.
A lot of people took them at their word, and lost a lot of money. JP Morgan reportedly lost $150 million from the deal.
Part of the drop in oil prices is in part caused by the rise of the dollar because oil is priced in dollars.
The Swiss had wanted to keep the EURO/franc ratio stable in order to support exports protect and Swiss production from (relatively) cheaper imports. The ”peg to the EURO” required supporting it by buying EUROs. But doing so also artificially depressed the franc against all currencies(other influences being equal) that’s why the franc jumped vs other currencies. The negative results of this policy such as getting stuck with devaluing EUROs, begin to outweigh whatever benefits there may have been.
It’s not the size of the economies that matter, per se. It is the signal they’re giving that it’s okay to exit the Euro. This could lead other nations to get the RIGHT idea.
“Black Swan” event? (q.v.)
IIRC, The Germans and some other nations were rapidly moving their physical gold reserves out of New York…
They were stymied initially, and only removed 5 tonnes in 2013. I guess someone leaned on them pretty hard. They have resumed repatriating their gold with a vengeance now, and have removed 120 tonnes in the last 6 months or so.
There’s a reason the Swiss were able to stay neutral during the World Wars. Even dictators like to have a safe have to retreat, if necessary.
As the strongest economy, and also as the prime pushers of currency union, I expect that Germany would drop out last…unless all the other countries ganged up on it unfairly.
IMO, Germany will leave the Euro when they’re the last member nation left.
Yeah but it’s at least 80% more stable.
66 countries allow their currencies to float plus the EURO zone countries. The BFD part is the exposure of the fragility of the EURO. Costa Rica like Switzerland and Denmark do not. Unlike Denmark and especially Switzerland nobody anywhere cares what Costa Rica thinks about anything.
How much did the SNB loose? Not sure how big that sin was. Propping up the EURO is inherently dishonest.
Germany will not be the last country without a chair. I’m sure they’ve been discreetly stockpiling high quality banknote paper for when the time comes.
I wouldn’t worry about the likes of JP Morgan. Just like in 2008-2009 their friends at the Fed will find a way to transfer those losses to the taxpayers.
On the contrary, their loss would be proportional to their leverage against the franc — which is to say, their share of forcing that decision. They earned that bitchslap, and I’m sure made plenty of money in the meantime. They will get no sympathy from me.
I’ll bet Swiss francs to EUROs that the physical gold in the fed’s vaults is gone before they get all of what’s owed them.
Currency inflation in Europe, what could go wrong with that?
Schweiz is an indigestible lump. Hitler asked the OKW if they could the the country and was told yes, but the Army will not exist after it’s over.
Goering supposedly asked the Swiss CG what he would do if a Million man Army appeared on his borders. The retort, so the story goes, “we’ll each fire twice.”
There ain’t much of that out there. I’m sure there are many who wish they had kept the DM.
Ain’t no way it will happen. The “leaders” of each country are far too stubborn in their nationalistic pride to allow such a thing. At the same time, they know there won’t be any Panzers this time around. What they don’t know, however, is that will come may make them wish Panzers were coming.
Not a thing. The stories you hear about Uncle Adolph are just vile calumniation. He was really just a laid back chap that liked mountain scenery, dogs and kids.
As an aside, when I was in Germany last time, I had to sit through a course entitled “Cultural German.” Not a bad course, really. The instructor was a trilingual German who called Hitler “Uncle Adolph.” I thought that was funny given I was in a USAREUR dependent school. He would have been in his 30s when Hitler was in power.
I’ve never understood why so much foreign-owned gold was kept in the States…
I believe WWII.
The euro is far from their only problem. Tepid growth at best, growing unemployment, spiraling costs of welfare states, and consumer angst all are playing a role. This has been brewing for several years, so far stop-gap measures have been putting off the reckoning. But sooner or later, it must come.
China’s reported growth is down to 7.4%, their lowest in 25 years. Cheaper energy will help everyone but, again, it’s a temporary fix for a long-term problem.
Ultimately, foreign bankers are scared.
The gold story has been spun as anti-USA, but that really isn’t it.
The Europeans know they have screwed their pooch and scrambling to find a savior.
The US is probably 10 years from that very same problem….let us hope that our country’s leadership…public and private, returns to some level of rationality after the Obama folks finally cede the Executive.
At some point the policy of ”kicking the can down the road” leads you to the massive intersection where all the kicked cans from all the roads have been kicked into a pile. Sooner or later a can kicked into that pile knocks the whole pile down on all them can kickers.
JimR here’s a good understandable explanation.
http://bastionofliberty.blogspot.com/2015/01/monetary-inanity-part-infinity.html
I’ve read your reply several times and somewhat puzzled. The light came on.
By ”high quality banknote paper” I meant literally paper suitable for printing new banknotes, in this case new DMs.
Thank you, that was helpful.
Switzerland never adopted the Euro. Its currency is appreciating against the Euro.
JP Morgan was not in danger in 2008 from its own business decisions. It might have been from general panic. Neither was Wells-Fargo. Berkshire Hathaway was willing to invest in Goldman, Sachs and Nomura was willing to invest in Morgan, Stanley at the height of the crisis, which suggests that these institutions were not insolvent. Bank of America’s problems derived from swallowing Merrill Lynch (a deal it tried to abort) and Countrywide. The real problem institutions at the beginning of 2008 were Fannie Mae, Freddie Mac, AIG, Citigroup, Merrill Lynch, Lehman, Bear Stearns, Wachovia, Washington Mutual, Countrywide, and some of the bond insurers. For all the complaints about ‘the banks’, only three of these ten institutions were engaged in deposits and loans banking.
At this point, we’re dealing with an entire flock of Black Swans. The only question is which one will land first.
Which? What?
the Europeans have been living beyond the means justified by their production for years and years and years, and it has caught up to the weaker economies.
Which European economies are running a current account deficit on their balance of payments?
Think, Mexico having the right to print U.S. dollars without restriction.
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Paper currency and coin is locally minted and printed, but that’s a small part of the money supply. The money supply in the Eurozone is regulated by the European Central Bank, not the member countries.
I understand that. It was an analogy.
It’s not the union-forming that kills you, it’s the modeling of it on the French Revolution. The EU Parliament is like some weird form of Fabian Fascism. I keep expecting a return of the guillotine.