Michael Wilson isn't as impressed by France's defence of the euro as he'd hoped to be.
Okay, I admit it. I snorted a bit this morning when I saw that France’s finance minister Michel Sapin had called for what he called a “rebalancing” of global trade patterns that would help currencies like the struggling euro to regain its rightful historic strength against the mighty US dollar. The trouble was, Sapin claimed, that too many of us are wilfully choosing to denominate our sales and purchases in the damnable greenback when we could be doing everything in other currencies. Which would have been a timely thought as the euro lurched toward some kind of a bottom against other major currencies.
Well, I thought – and as Mandy Rice Davies would have said – he would say that, wouldn’t he? Especially since France’s own government has spent the last thirty years splashing out exactly the sort of subsidies that have helped to bring the single European currency to its current low. Hasn’t Mr Sapin heard of free floating exchange rates? Doesn’t he like it that global investors can choose whatever currency they like when making bilateral purchases? And that if they’re given a choice between a fast-growing, fully integrated economy like the US and the lethargic, fragmented and politically troubled European one, they’re probably going to go for the currency that’s underpinned by the healthy one and not the sick one?
The Real Issue
But I’d jumped the gun. It turned out that Mr Sapin was referring specifically to the way that Europeans choose to trade not just oil and gold between themselves, but also Airbus aircraft wings and all sorts of other home-grown goodies, in the United States’ currency rather than their own. Even though it would probably mean two lots of completely unnecessary currency conversions along the way. (Euros to dollars, then dollars back to euros.) That, at least, seemed to make some sense. And all of a sudden, it seemed he had a point.
In his case, Mr Sapin also had a chip on his shoulder the size of a giant redwood. The previous week, France’s BNP Paribas had copped a staggering $9 billion fine for helping Sudan, Iran and Cuba to avoid US sanctions. The point being, as far as I could follow it, that those countries had incurred the wrath of Washington by virtue of the fact that the US dollar had been the basis of the transactions – and that that in turn had allowed the US to exercise extra-territorial rights over something that was really none of its business. Which was why BNP had been jumped on so heavily.
The Other Issue
That, I think, is a fair summary of the way that it’s being presented to the French public. And that would have been a logical argument for encouraging those countries to bypass the dollar altogether and use something that wouldn’t have brought Washington down on their extraterritorial necks. (Although in this case, as I've since been reminded, BNP's self-acknowledged long-term money handling for the murderous Sudanese government would have been considered out of bounds for most institutions with a corporate conscience. As would its equally self-acknowledged attempts to cover up the bad news afterwards.)
In practice, European banks have been grumbling for a decade or more about the way that US banking and financial laws are routinely wheeled into play when purely third-party transactions, such as a deal between Paris and Tehran, take place. Why should America dictate what another great political bloc can and can’t do? Why can’t it mind its own damn business?
To which Washington would undoubtedly reply that everything is its business, and that the reason it can stamp its authority on Europe is that the rest of the world likes it that way. America’s currency isn’t the default choice simply because of its economic size, but also because of the consistency of its policy – especially when compared with the dodgy mess that Europe had got itself into. When people go into a currency transaction, they prefer it if the future of the exchange rate looks like a reasonably straight run rather than a rollercoaster ride. Exchange rate uncertainty only adds to the risk and increases the spreads, which isn’t cost effective for anyone.
There are many countries pressing for a demotion of the dollar – not least China, which wants to see the International Monetary Fund’s Special Drawing Rights re-weighted so that they're based on more gold and Asian currencies and fewer dollars. And that’s an issue that will play itself out over the coming decades as China’s economy overtakes the United States. (2020 is not looking unrealistic there.)
The Next Question
But in the meantime, here’s a question for Mr Sapin. Why does he suppose that, in the early years of this century, the euro was a more popular choice for corporate bond issues than the dollar? And, given that early success, how does he account for the fact that the greenback has now regained the upper hand?
Could it be that his own countrymen, and those of his Euro Club allies, aren’t as sure of the euro’s infallibility as he is? Perish the thought.