The EURO is to currencies what TINDER is to Apps: everybody loves to criticise it but…
at the end of the day, a lot of people you wouldn’t expect end up using it.
I’m sure many of you have heard economists and experts of all kinds making predictions
about the end of the single European currency.
The best thing Germany could do for Europe is quit the single currency – but it won’t
Larry Elliott for The Guardian
“The euro is a patently flawed construct, which its architects knew at the time of its
creation” –George Soros
Nevertheless, the reality is way different.
In fact, the EURO is the second most common worldwide reserve currency.
And at the end of this video, you’ll see how it might not be far from being the first.
Think I’m going nuts?
Definitely not!
Look, one third of the International trade uses the EURO as its exchange currency.
20% of the reserve currencies from central banks are denominated in Euros.
And many other countries also issue debt in this currency.
But this is not the end of the story!
If you follow VisualPolitik every week, you already know that Donald Trump is putting
lots of tariffs on international trade…
So what does this mean?
Think about it!
If Americans are going to buy less stuff abroad, there will be fewer dollars in circulation.
Then again…
Who’s signing free trade deals with every mother’s son?
Exactly!
The European Union!
They have already passed a treaty with Canada, the so called CETA.
But this is not the only one!
In the last two years, Europe has reduced tariffs with Japan, Mexico and many other
countries.
In other words, the more Europeans buy abroad, the more EUROS there will be in circulation.
This means there could be a moment where instead of having ONE hegemonic reserve currency…
we might have TWO: the US Dollar and the Euro.
OK, OK, I know what you’re thinking now… and what good does this do?
Is it really useful for Europeans to have the EURO as the hegemonic currency?
Well… yes and, at the same time… no.
If you’re watching this video from any EU country and, let’s say, you have a company,
having the EURO as the World’s reserve currency won’t help you all that much.
But… if you’re working for a European Government…
Boy, you are really feeling lucky!!!
If there’s a big demand for euros, the European Central Bank will have a bigger margin to
print money without devaluing it.
Anyway, we talk about this in our video about the dollar.
If you haven’t seen it yet, there’s a link in the description.
Now the big question is…
Why is the Euro more popular than any other currency?
For example… why the Euro and not the Chinese Yuan?
Why are so many economists so critical of the euro?
Today, we are going to answer these questions, but before we do, let’s take a look back
at history.
EXISTENTIAL CRISIS
During the 70s, European countries were happy to trade with each other.
Although there was no European Union back then, there was something very similar, the
so-called COMMON MARKET.
Nonetheless, there was a problem.
Each country had its own national currency.
And each currency worked in a different way.
For example, the German Mark was strong and stable.
But the Italian lira was devaluing every other day.
So imagine this situation.
You work for a German bank and you lend 1 million liras to an Italian company.
In this moment, a million liras are worth 1000 German marks.
But when it’s time for that Italian company to give you back the money, the Lira has been
devalued.
So, even if you get 1 million liras back, when you exchange it to your local currency,
you only get, say, 900 german marks.
A hell of a business transaction!
Isn’t it?
OK, so in order to avoid this, the European politicians met in a room and… well…
…apparently they tried something… pretty strong.
They came to an agreement called the... snake... in the... tunnel.
So, well, the snake is kind of a methaphor for the currency fluctuations... right?
Because... you know, currencies go up and down like a snake.
So, if you don’t want the snake to go crazy... you...
make a tunnel, right?
This way... the currency doesn’t fluctuate.
Well... look my dear viewers: this was the 70s, a crazy time were Bob Marley was still
alive and bellbottoms were trendy.
So did this snake in the tunnel agreement work?
Of course not!
During the 80s, European currencies went up and down like a... drunk snake in a very wide
tunnel.
This is why, decades later, European politicians met again in another room.
This time it was 1992 and this agreement had a more proper name: They called it the MAASTRICH
treaty.
And in this one, they got really serious and said:
Let’s not fuck around!
We will create a common currency for all.
No more exchange rates, fluctuations, or bullshit...
What?
What do you say, Great Britain?
You don’t want in?
OK!
Great Britain!
You can go fuck yourself with your sterling pound, your five o’clock tea, and your driving
on the wrong side of the road!!!‘
And this is how a three step process to create a single currency started.
In 1999, all the EU stock markets started listing in Euros and, later on, European citizens
started using the new coins for their daily trades.
Now we all have gotten used to hearing about Euros like any other normal currency.
But make no mistake, back then, it was an unprecedented financial experiment.
And... this is how the first critics came up.
Europe exemplifies a situation unfavourable to a common currency.
It is composed of separate nations, speaking different languages, with different customs,
and having citizens feeling far greater loyalty and attachment to their own country than to
a common market or to the idea of Europe.
–Milton Friedman And now you might wonder…
What is the problem with a single currency?
That’s easy.
If we have a single currency, that German bank we talked about before, will have no
problems lending money to an Italian or a Greek company.
So what happens, then?
Well… since there is no currency risk, German banks, having a lot of money, lend it to poorer
Italian, Greek and Spanish companies.
All of a sudden, rich countries started investing in poor countries like there was no tomorrow.
And yes, yes, I know what you’re thinking now…
Where’s the problem, then?
Well, the problem comes with the crisis.
Banks must take bigger losses on Greek loans, says German finance minister
Basically, the Southern European economies are poorer and weaker.
When there’s a crisis, their companies are the first ones to go bankrupt.
So if companies can’t pay their debts back, the banks can go bankrupt too.
This is what we call the RISK OF CONTAGION.
This explains why, during the 2008 crisis, so many politicians and economists suggested
abandoning the Euro.
Many of them talked about the creation of two different EUROS: one for the wealthy countries,
solid and stable, and another for the poor ones.
One that could be severely devalued.
Nonetheless… today, the EURO is still alive and kicking.
Why?
We’ll see right now.
LONG LIVE CHAOS!!!
Critics are right: the European Central Bank, also known as the ECB, is a modern day Babel
Tower.
It works similarly to a country’s government.
The current president is a man named Mario Dragui and the executive board is something
like the executive power.
But we also have a legislative power: the Governing Council.
This is where you have representatives from all the Eurozone countries.
There’s one from Spain, one from France, Germany, Slovenia… well, all the countries
that have the euro as their currency.
These guys are the real decision makers.
They decide whether to raise of lower interest rates or print more or less money.
But before they do, they have to reach an agreement.
And this is where the problems start!
The Southern European countries want to print more money but their Northern neighbours don’t.
Since they can’t come to an agreement, it’s almost impossible to make drastic decisions.
This is all true and the problem is…
(((LOOK AT THE CAMERA FOR 4 SECONDS IN PURE SILENCE)))
… ahm… well…
Where is the problem?
I mean, where is the problem in having a currency that cannot be devalued because those who
are in charge of printing it don’t agree with each other?
Isn’t this a strength?
We talked about this thousands of times on VisualPolitik.
The best currency is the strongest one.
If the value of your money doesn’t change, there is low inflation and you can do your
shopping without being afraid of losing your money.
You can start your tech company because you know you can invest long term.
And you might wonder now… but is the EURO that stable?
Well… look at this chart!
Here you can see a comparison between the monetary supply, the so called M2, of the
ECB and the American Federal Reserve.
Can you see how they go hand in hand?
In less than 20 years, the EURO has become as solid as the American Dollar.
In fact, Europeans have already forgotten what inflation even is.
For a better understanding, the American Federal Reserve has two main goals: keeping inflation
low and keeping unemployment low too.
The European Central Bank, instead, has just one goal on their agenda: monetary stability.
And, so far, they have achieved it!
So yes, we can say that the EURO is as solid and abundant as the USD but… could it be
even more solid and abundant?
Well… the answer is yes.
Today, Eurozone has around 320 million inhabitants… almost the same as the United States.
But despite the European economy being poorer than the American one, the eurozone can increase
as long as new countries join it.
In the last 10 years, 6 new countries have adopted the Euro as their currency.
And, despite the political climate not being very in favour of it, Poland of the Nordic
countries might end up using it at some point.
If this wasn’t enough, there are many other currencies that are linked to the EURO.
Do you remember this other video where we talked about the French colonies in Africa?
There we said how countries like IVORY COAST and SENEGAL have a common currency called
the CFA FRANC.
This currency is linked to the EURO.
And we’re talking about more than 150 million people in emerging economies.
In other words, with so many people using EUROS in their daily lives, there are enough
coins out there to make it easy for any company to get them.
But, OK, now you might be thinking…
Yes, Simon, a lot of people are using Euros but… you know what other currency has a
lot users?
The Chinese Yuan!
Also known as the RENMINBI.
It’s becoming more and more in fashion nowadays… so…
Why are we gonna use EUROS and not RENMIMBIS?
Well, we’ll see why right now.
YUAN’S FLAWS
You’re right!
China is full of Chinese people!
And those Chinese people use YUANS, also known as RENMIMBIS, for their daily transactions.
This means high great demand for this currency and lots of notes and coins in the market.
At first glance, this should be enough for the YUAN to become an international reserve
currency, right?
Well… there is a problem…
China puts US$15,000 annual personal cap on overseas bank card withdrawals
Yes, you heard this right: China does not want yuans to leave the country.
This is why they put lots of capital controls in place.
In other words, finding yuans in the international market is not an easy job.
In fact, China wants to avoid Chinese businessmen taking Money out of the country.
Hence, the Chinese People’s Bank has lots of restrictions.
And, as you can imagine, in a dictatorship like the Chinese one, it’s hard to believe
in the independence of their central bank.
In other words, if Xi Jimping needed to, he could change the Governor’s bank and start
printing money at will.
Don’t believe me?
Do you really think a political system doesn’t affect a currency?
Oh, come on!
You should watch our video on Turkey.
There you’ll see what happens when you mix authoritarianism and economic crisis.
Meanwhile, it’s your turn.
Do you think the EURO can become as important as the dollar?
Or maybe we’ll see a brand new crisis destroying the European single currency?
Please, leave your answer in the comment section below.
Also visit the reconsidermedia website, they are the podcast that provided the vocals in
this episode that were not mine.
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