Hamish McRae: Invisible apartheid points to cracks in euro working
Economic View: The eurozone is badly built and now Greek money is not the same as German
Thursday 23 August 2012
Anyone with any sense of humanity must surely feel deep concern for the Greek people. Unemployment is now approaching 25 per cent of the workforce, while youth unemployment has passed 50 per cent. Pensioners have seen their income cut by roughly a third and additional taxes are being levied in an arbitrary and disorganised way.
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This is the background to the continuing and increasingly desperate pleas being made by the Greek prime minister Antonis Samaras for more time to carry out the reforms demanded by the eurozone as a condition for further help. Mr Samaras claimed that "more time does not automatically mean more money," but in practice it would and since the country has already required two bailouts, the eurozone authorities are understandably cautious about extending a third. But the mountain Greece faces seems impossible to climb: under the terms of the present deal, it has to cut public spending by more than 5 per cent of GDP. Meanwhile the talks carry on and while it is always possible to kick things along a bit further, I think we all know where this is likely to end.
The problem for the rest of us is partly that the story has become so complicated that it is hard to pick what is new and important from what is more of the same; and it is partly because any one point of detail – reluctance by the European Central Bank to print more money, whatever – could trigger a chain-reaction of unpredictable consequences. The underlying problem is very simple: the eurozone has been badly constructed and is not in any case a natural single currency area. But the efforts to patch it are so complicated that even those of us who are supposed to know what is happening get a bit flummoxed.
But I think something big has happened in the past three or four months that has not attracted the attention it deserves. It is that the euro has in some respects stopped functioning as a single currency. In other words a German euro is not the same as a Greek euro, or an Italian or Spanish one.
Money in standard theory has three main functions: a unit of account, a medium of exchange and a store of value. On the first, you could maintain that it is still doing its job. At any one time the euros of any country can be exchanged for, say, an ounce of gold at a fixed price. But on the other two, it isn't.
If a Greek enterprise is seeking to carry out a significant international transaction it may find that the legal contract will be framed in such a way that should Greece leave the eurozone, the supplier will be paid in German euros. Alternatively payment has to be made in advance, so the money can either be placed on deposit in Germany or transferred out of euros. I understand similar provisions are applying to Spanish and Italian euros. So the euro is no longer performing as a single accepted medium of exchange; the currency has become a tiered one.
Nor is it being treated as a single currency when fulfilling the role of a store of value. We have seen a flight of capital from the fringe European countries to the UK, as people buy property here, particularly in London. But even within the eurozone a euro is not the same. Companies with operations in different countries typically sweep any spare cash out of Greece, Italy and Spain every night and deposit it in German, Swiss or Dutch banks. Large companies with similar credit ratings have to pay different interest rates depending on their national location. Thus an Italian company has to pay more than the equivalent German one. So while on the surface the eurozone appears a single entity, albeit with very different economic conditions depending on location, there is an invisible apartheid evolving.
In a recent paper Matthew Lynn of Strategy Economics describes the euro as a "zombie currency". "The euro still has notes and coins," he writes. "But in almost every other sense it is no longer a single currency."
I think that is a bit strong and I also think his tongue-in-cheek date for the break-up of the eurozone, 28 July 2014, is a bit early – I would go for July 2017. (Spurious precision is one of the curses of economics as presently practised, so let's send it up.) But you can catch a feeling for the mounting tensions from the graphs. In the middle is the year-on-year percentage change in labour costs in Greece. As you can see wages are now falling at a rate of 15 per cent a year, something quite unprecedented in post-war history in Europe. On the right is the rise in claims of the Bundesbank against the euro-system. What is happening here is that people are taking money out of banks in the rest of the eurozone and piling it up in German ones, typically to pay for German imports. The Bundesbank has to absorb these flows, building up these claims against the central banks of the fringe countries.
Finally, on the left is the net investment position of different eurozone countries (plus the UK and US), expressed as a percentage of GDP. Unsurprisingly Germany has a sizable net creditor position, owning more assets abroad than the assets in Germany owned by foreigners. France is more or less square, while the fringe countries have a huge net deficit. The position of the eurozone as a whole is broadly similar to that of the UK and US, but only if you regard it as a true single currency area. Arguably it no longer has those characteristics.
Come back to Greece. No one needs to defend the actions of past politicians, or their advisers. But only in the loosest sense should the Greek people be responsible for what those politicians did and they bear no responsibility at all for the ill-constructed currency system. And asking for more time does not fix the problems of the euro.
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