The Dictator Is Gone, Let's Print Some Euros

News of Hosni Mubarak's departure has dwarfed another high-profile resignation, one that would normally top the news pages. 

Axel Weber, the Bundesbank President, is leaving at the end of April. Yeah, I know, it sounds boring, another central banker just leaving, good riddance.

But what may actually follow is very important. His departure from Buba – and his non-participation in the race for European Central Bank chief when Jean-Claude Trichet leaves in November – means the ECB's philosophy will change maybe beyond recognition.

Weber was one of the staunchest opponents to the ECB's practice of buying government bonds from countries too weak and too indebted to be able to sell them in the markets. 

The central bank says it is buying these bonds only to ensure the orderly functioning of the markets. But if the markets price these bonds as very risky, this probably means the markets perceive a risk there, therefore they are functioning in an orderly way... so why should the ECB intervene?

Since the beginning of the crisis, the ECB has lost a lot of its credibility. It keeps saying the only needle in its compass is fighting inflation – but it keeps acting as if it has to save the periphery members by buying their bonds, in exchange for imposing fiscal tightening measures to try and solve the mess.

Many people will say there is nothing wrong with the ECB doing all these things – after all, somebody has to be in charge. Except, of course, that its members were not democratically elected by people in these countries so therefore they have no mandate to impose raising taxes and cutting spending.

Really, the ECB should just stick to their needle. But maybe that's what Weber's decision is signalling: that the ECB's mandate of just fighting inflation is really and truly over. Let the money printing...err, bond-buying bonanza begin.

PS Come to think of it, one good thing may come of this: the markets may save the day. Investors may think that, with Weber gone, the ECB won't shy away from printing money. They will therefore price the periphery bonds as less risky, since the ECB is there to save them. So the ECB may not need to actually print the euros. Spring is near, let's be positive.

Does Freedom of Speech Lose You Money?

China has passed legislation dictating that only journalists with experience or qualifications in the business sector may write about stock and futures exchanges, Zinhua reports.

Now, in a democracy such a law would not really be possible nor, I should add, desirable. After all, freedom of speech is what allows each of us to write about whatever we want – and it’s up to the readers to make up their mind if they believe us or not.

But what about when those readers are traders who are making or losing millions of euros (dollars, yen, whatever free currency – not yuan, obviously, as that’s still tightly controlled) based on what’s written in the press and on the internet?

The Swiss Knife

Case in point: Portugal debt got hammered on Friday and the euro got hit by news reports that the Swiss National Bank had excluded Portuguese debt as collateral eligible for repos. 

The context of that story is that on Wednesday the Swiss National Bank confirmed it excluded Irish sovereign debt from the list of instruments it accepts as collateral for its repo operations.

(With repos, banks in need of cash can sell securities to the Swiss National Bank, committing to buy them back at a specific time for a higher price. By excluding Irish debt from the list of selected instruments for such operations, the SNB effectively reduced availability of cash to banks with high exposure to Ireland.)

The Irish news was first reported by an Irish blogger on January 4 but the exclusion actually happened in December 2010, when the SNB published the adjustments it made to the basket of instruments it accepts as collateral.

Portugal Shoots Itself in the Foot

On Friday, riding on the success this story had in spooking markets, Lisbon newspapers apparently reported that Portuguese debt had also been excluded by the SNB from its list of eligible collateral for repos. This scary piece of news was quickly re-printed by other media.

What few media reported, though, is something they could have found out by making a phone call to the SNB: a spokesperson told the few curious hacks who called that the Swiss central bank had stopped accepting Portuguese debt as collateral more than a year ago, because it no longer fulfilled the rating criteria.

If more journalists had made that call, this scary story would have looked totally different, with a headline saying something like “Old News: SNB Doesn’t Like Portugal’s Debt Either.” 

Swiss Precision?

But wait, it gets even better. It’s not just the journalists who sent out confused messages, it’s the central bank itself, apparently.

If initially it said it hasn’t accepted Portuguese debt as collateral for over a year because of ratings downgrades, later the SNB sent out a statement in which, according to Reuters, it said it actually never accepted it because of settlement issues.

Do we need a law like China’s in Europe? I don’t think so, seeing as we claim to be a democracy. But we do need authorities who promptly put out the correct message for markets. 

Oh, and journalists who think at least twice about the consequences of the stories they write – and about their accuracy, since they’re at it.

Eurozone Break-up May Lead to Third World War

Dismantling the eurozone may bring upon the world its third world war. WWI and WWII both started in Europe, so why should WWIII be any different?

According to the Maastricht Treaty, European Union member states must adopt the euro (with the exception of Britain and Denmark, which have negotiated an opt-out) as their currency at some point, if they fulfil the convergence criteria.

No timeframe is given for the adoption of the euro and this is how Sweden, without explicitly opting out of the monetary union, has deliberately avoided joining by failing to meet the convergence criteria.

The eurozone currently has 16 members (17 with Estonia joining on January 1, 2011) but, since the Greek crisis erupted in full early in 2010, chatter about countries leaving or the monetary union breaking up altogether has grown louder and louder.

But if the eurozone were to break up, the consequences may eventually lead to war because of the sheer depth of the resulting political, economic and social crisis and the lack of hope that would follow.

The EU treaties do not allow a member of the eurozone to leave the monetary union while staying in the European Union. It’s either the EU and the euro, or nothing.

Leaving the eurozone would mean leaving the EU – and all the advantages that it confers, such as selling goods in the rest of the 27 member states without having to face import duties, selling services freely to them, being able to access capital from these countries, freedom of movement of citizens within the area.

Fragmented Backwater

It may not seem like much, but it has brought on incredible economic progress, especially for the less advanced members, and it has been achieved after decades of patient diplomatic negotiations. It has also put a lid on various inter-ethnic conflicts in what is probably the world’s most divided continent.

Membership of the euro was regarded by some members as the ultimate proof that they have “made it” in a select group of economically-sound countries, with clear rules and advantages and part of a strong currency, without the often-painful fluctuations brought on by massive devaluations.

The euro also acted as a catalyst for lesser developed members of the EU, providing them with something to aspire to, an incentive for reform and economic progress.

The EU, as a whole, guarantees its citizens freedom of movement, freedom of speech, access to a clear justice system and the right to have their voice heard. Yes, I know that it doesn’t look like much has been achieved by the EU, but this is because citizens too often take these rights for granted and don’t even realise they are exercising them every day.

If the EU were to disintegrate, Europe would go back to being the fragmented, war-mongering little backwater it used to be. There would be no super-power on the continent, just a few big and strong countries trampling over the little ones in their fight for domination.

Let’s imagine this scenario: everybody goes back to their original currencies. What happens is that the German mark and the French franc appreciate strongly, while the Greek drachma and Spanish peseta plummet. What can countries do to counteract the negative effects?

What Could Lead to War

Without the legislative framework of the EU, which specifically prohibits it, protectionism would flourish. Germany and France may limit inward investment in their currencies to keep them from strengthening, while Greece and Spain may do the opposite and put limits on outward flows of capital.

Next, Germany and France may limit inward migration, to protect their rich economies from hordes of poorer Europeans looking for work, while massive unemployment in Greece and Spain may cause street riots the scale of which has not been seen in a long time.

Things would not be rosy for Germany and France either because, without the common market, they would find it harder and harder to sell their products and services abroad as import taxes in the poorer former member states and various regulatory restrictions on imported goods and services would take effect in an attempt to protect local economies.

Resource-rich countries – such as Russia – may see this as an opportunity to negotiate “preferential” tariffs for their energy exports with each country in the former union; thus, different energy prices would distort competition even further.

All this would throw the former EU back decades in time as it would stifle innovation, bring development to a screeching halt and increase social unrest to the point of boiling over.

It doesn’t take a lot of imagination to get from that to nationalist/extremist parties rising to power in many former EU states on hollow promises of better living and on blaming “others” for the country’s misfortune, and eventually sparking the third world war.

I know many people will accuse me of scaremongering. But if you think back to the history of this continent, the EU is the only form of union that has brought incredible peace and prosperity to millions of people, without making others suffer in the process. I believe that such a union must absolutely be defended.