Sharing A Currency Means Giving Up One’s Own Sovereignty

I’m no expert in economics, but this doesn’t stop me from having my own thoughts on all things economics.  Thus, if my thoughts on economics are skew somehow, you have to forgive me for having a weak forte in economics.  Hmm…, weak forte is an oxymoron?  Anyhow, in this blog post, I like to persuade you why holding on to sovereignty is bad for a country which shares a currency with other countries.  Beyond the scope of currency matters, the good and the bad consequences for a country to give up one’s sovereignty is entirely another topic in which I don’t want to delve into in this blog post.

There are 19 European countries that are using Euro currency.  These countries are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.  Certainly, you can think these 19 countries that are using Euro as a region in the West, westward of Russia and China.  To simplify things in this blog post, I like to say the West whenever I refer to these 19 European countries.  Contemporary economic troubles that are stirring unrests and provoking new economic fault lines in the West can be argued that one currency Euro is the source of troubles of the economic crisis in Greece and several other Euro’s member countries.

In my opinion, the U.S. Dollar or the China Yuan or Japan Yen and so on has always been more flexible than Euro, because Euro is not a currency for a coherent country but for 19 countries with incoherent economic policies.  Instead of seeing economic progress for all countries within one currency system, we are seeing some Euro countries do really well and others are either bankrupted or on the verge of defaulting.  Incoherent interests among these currency sharing countries have divided these countries from forming up a coherent economic plan.  Without a coherent economic plan, these currency sharing countries are failing to execute economic policies that would work for most if not all member states (i.e., countries that are using the same currency).

For an example, Greece of today may be a very good country for tourism and several other service industries, but this country does not have a strong foundation of manufacturing high value products.  Taking this narrow point of view on Greece’s economic structure, we can see that Greece has to import a lot stuffs for internal consumption.  What would happen when service sector and several other sectors fail to produce net profit for Greece?  Greece has to spend less on internal consumption of course.  Unfortunately, Greece’s economic crisis evolves with how Greece is spending more than Greece can make, thus the whole country is now bankrupted.  In this situation, we can see that Euro currency isn’t able to dictate the economic policy to Greece in a way that Greece won’t have to go bankrupted.  In this situation, Greece cannot print more Euro since it has no power to do so.  If Greece can print more Euro, it may be able to attain more Euro to pay off the debts at the cost of devaluing the Euro.  Without being able to print a country’s own money to get out of debts (i.e., work for short term at the expense of the purchasing power of the next generations), Greece may have to find other means of bringing home the bacons.

The example of Greece shows that country without one’s own currency can prevent a country from having a second chance of righting the sinking ship.  Without being able to repair a sinking ship, how one can expect Greece to be able to get out of the economic crisis?  Foreign countries can continue to lend money to Greece — increasing Greece debts without knowing for sure that Greece would be able to pay back — to help Greece sustains the sinking ship from sinking.  Nonetheless, without repairing the hole from the sinking ship, no amount of extra lending would be able to suddenly make the hole whole.  It’s like you keep on scooping the water out of the sinking ship while the hole keeps on letting in more water into the sinking ship.

Without having one’s own currency, a country may experience the devaluation of a currency without having any choice in the first place.  For an example, Germany’s economy got most things right, thus Germany doesn’t need to weaken the Euro for generating an attractive export industry, but Greece and other European countries need to have Euro to be weakened for various economic benefits.  If European countries are banding together to devalue the Euro for economic benefits, this means Germany will have to be a reluctant party to the devaluation of the Euro.  If the Euro is being devalued, Germans will see their wealth being stealthily taxed away by other Europeans, because currency inflation weakens the overall health of the wealth holding of every German.  Basically, Germans don’t have a choice if Germany wants to see Euro’s member countries devalue Euro for economic benefits.

In the long run, the disparity of the rich and poor members within a single currency system will become ever more so apparent.  The disparity of such a scale within single currency system will be the force that can eventually break the system apart.  Once the system breaks down, the rich members will go on, hopefully, with a better currency system.  The aftermath of a broken single currency system will make things a lot harder for the poor members.  The poor members will have to fight an uphill battle, because they lack the economic prowess.

A single currency system can work only if all member countries become one country!  As each member country gives up the sovereignty, each member country has to act as a state and not as a country.  This means the states need to listen to a centralized power.  This centralized power will execute general, coherent economic policies.  Sure, each state can have its own economic policies, but these economic policies would be localized and limited in scope and scale.  Since each member country gives up sovereignty to become a state, it’s pointless to spend the money that they don’t have to upkeep big military as if a country would do.  Thus the implication of truly giving up one country’s sovereignty for sharing a currency can go beyond the scope of economic matters.

Basically, a true country needs to be efficient in resource allocation.  Nonetheless, a true country also needs to be able to generate needed resources in the moment of need, thus the power of printing money comes in handy.  Perhaps, the power of mobilizing many states’ resources in a coherent manner in the time of need can also be very effective in stabilizing the crisis moment.  As long a true country has a clear, efficient picture of the resource allocation, it can figure out which resource needs to be generated in extra for strategic purpose.  The redundancy of a strategic resource can later bail out a country from a resource lack crisis.

If 19 European countries in Euro currency zone can become one true country, then the Euro may become more flexible.  Nonetheless, one’s own currency doesn’t necessarily translate into healthy economy for a country.  We had seen countries devalued one’s own currency to the point of the currency became worthless.

Quote from Wikipedia:

By late 1923, the Weimar Republic of Germany was issuing two-trillion mark banknotes and postage stamps with a face value of fifty billion mark. The highest value banknote issued by the Weimar government’s Reichsbank had a face value of 100 trillion mark (100,000,000,000,000; 100 million million).[15][16] At the height of the inflation, one US dollar was worth 4 trillion German marks. One of the firms printing these notes submitted an invoice for the work to the Reichsbank for 32,776,899,763,734,490,417.05 (3.28 × 1019, or 33 quintillion) marks.[17]  (Source: https://en.wikipedia.org/wiki/Hyperinflation)

To conclude this blog post, in my opinion, one’s own currency allows the possibility of currency manipulation.  Usually, a country manipulates its own currency to gain trade, tourism, and other advantages.  Nonetheless, if not careful, currency manipulation can drive one’s own currency into a currency hyperinflation, leading to a worthless currency in which nobody wants to have anything to do with such a currency.  Worthless currency won’t be able to support trade and so on.  Sharing a currency is not the same as having one’s own currency, and the disadvantages of sharing a currency are many.  The lack of the ability to freely manipulate one’s own currency, currency sharing country will have to rely on self-discipline in nation spending.  If a currency sharing country cannot produce anything of values to bring in a net profit, a currency sharing country must cut spending even more since money printing isn’t possible, leading to apparent austerity and poverty.

Can The Euro Replace The Dollar As The Next Reserve Currency?

After finishing my reading of Chapter 5 for “Death of Money: The Coming Collapse of the International Monetary System,” it seemed at this point of the book the author viewed Euro as a potential challenger to the dollar as the reserve currency.  The author James Rickards surmised that the Eurozone could regain strength and vitality as long Germany and other Eurozone member countries could go ahead and reform several internal problems.

Although I don’t remember all of the internal problems James Rickards described that needed to be reformed for Eurozone, I think he’d mentioned about labor mobility and several others.  Nonetheless, James Rickards imagined that if Eurozone could move the unemployed workforces from Eurozone member countries to employment resource scarce countries such as Germany, then the unemployment problem for the Eurozone could be alleviated.  In effect of this, the revitalized workforces that were moved could once again contribute growth in terms of consumption and investment and so on in general.

I have to wonder though, would Germany and other employment resource scarce countries, assuming jobs are abundant and requiring to be filled, want a flood of migrants from Eurozone member countries to disrupt the local employment flow?  Nonetheless, it seemed that China had successfully implemented something like this by allowing migrants from rural area to migrate into the cities, consequently expanding the cities’ size, reach, productivity, and so on. As Chinese migrants are readily earned city’s incomes, they can then export some of their earnings back to the rural areas for whatever.  Perhaps, some of the migrants will have enough money to go back home and open up businesses of whatever, and this in turn slowly urbanizes the rural areas.  As China’s urban cities got crowded, overused, overpopulated, and so the labor demand for such cities cannot grow more — wages for such cities might be higher as workers expect cities’ wages and not of rural areas’ wages — the flood of migrants will slow down.  Nonetheless, China’s coastal cities can relocate factories and other essential industrial capacities into the inner China where rural areas are common, and in this process China finds cheaper labor and urbanizes the inner rural cities.

James Rickards imagined Eurozone member countries could do something as China’s labor mobility but without the factor of urbanization.  After all, many Eurozone member countries may not need urbanization at all if I’m not wrong on this.  I think Eurozone member countries can definitely improve the labor mobility to improve the Eurozone as a whole, but internal political strifes among Eurozone member countries may prevent this to be done without danger.

Imagine Germany’s political force may not want to see the German workforce order to be disturbed too much, because once the workforce order got disturbed it could be a lot harder for such a workforce order to be reversed back to its normal flow.  To make my point, let’s assumes that Germany is experiencing growth in general and demanding bigger labor workforce, migrant workers from Greece and elsewhere within Eurozone can migrate to Germany to fill up the labor demand.  The problem is when Germany begins to experience economic downturn, the huge number of migrants will not be viewed favorable to the local population.  At this point the migrants will stop migrating to Germany, and the migrants that are already in Germany will go elsewhere within Eurozone to find jobs.  If everything works out the way the supply and demand force is meant to behave for the labor demand in Eurozone, things will not be so bad.  Nonetheless, will Germany in an economic downturn easily find it to be easy to accept migrant inflow when the economy picks up again?  The bigger question is what if the whole Eurozone experiences economic downturn, where the migrants who work in Germany migrate to within the Eurozone?  Perhaps, the migrants may have to go beyond the Eurozone for jobs, but it’s not easy for the migrants to migrate beyond the Eurozone for jobs for obvious reasons (i.e., documentation issues, immigration issues, etc…).

It’s hard for me to imagine Eurozone as a whole uses a single dominant language for facilitating economic conditions.  French will forever speak French, German will forever speak German and so forth for the whole Eurozone.  I assume this will be the same for writing too for the Eurozone member countries.  My point is that every time migrants from Eurozone relocate themselves elsewhere within Eurozone, they may have to learn new language (e.g., writing, speaking) in order for them to be effective at their new jobs.  This won’t be easy if the economies within the Eurozone change too frequently (e.g., economic downturn, economic upturn).

I think we can pretend that many economic models and facts and equations can point out the problems and provide solutions for an economy, but we fail to realize that what matters most is the irrational behavior of humans.  We humans don’t behave rational all the time, because we are not the robots.  Robots follow the rules of the algorithms without theirs own rationalization.  Us humans tend to do things on our own as if we know best, thus when we become irrational we don’t think that we are irrational.  As a collective whole humans can be very irrational, and this shows why our history is full of wars and tragedies.  Our economies behave the way we are, and so when we are not so rational, our economies become irrational.  With this notion, I don’t think few simple suggestions such as labor mobility and so forth can be implemented with certainty.  Even with labor mobility and so forth could be realized, the global economy as a whole has too many moving parts, and these moving parts can be counter productive to the positive trends that occur within the Eurozone.  For an example, United States will not want to see the Euro rises for obvious reason (i.e., dollar’s reserve currency status must be upheld).  China too wants its currency to become a reserve currency in the near future.  With the two biggest economies in the world, United States and China, with very powerful military mights to back their agendas, it’s easy to imagine there are so many more moving parts within the global economy as a whole.

I think the author is too optimistic about the whole Eurozone as a whole.  I do think the author does have many good points on why the Euro won’t collapse and Eurozone won’t be breaking apart, because he explained well why United States and China do not want to see the collapse of Euro and Eurozone.  James Rickards mentioned that the United States had been wanting to keep inflation high in the United States and interest rate low for revitalizing exports and easy debt payments.  By printing more dollars, the United States can push inflation up.  By printing more dollars, the United States also keeps the Euro strong.  Besides United States exports deflation to Eurozone member countries, China too wants the Euro to stay strong for many reasons.  One noticeable reason which James Rickards mentioned is that China wants to diversify its foreign investments.  Instead of only investing in United States treasury bonds (i.e., dollar holding), China wants to convert some of its Dollar holding to Euro holding and other Eurozone investments.  This way, China does not have to put all of its eggs in one basket.  After all, how can one be sure that the dollar will be alright for indefinitely?

Entering Russia and so the picture of global economy becomes even more complex.  Russia does not want the dollar to be the only reserve currency, and Russia isn’t having a good relation with the United States since forever.  Especially since Syria, Libya, and Ukraine crises/conflicts, United States-Russia relationship has gotten worse than ever before.  In fact, many people think this relation is making a full circle (i.e., getting worse to the freezing point of the cold war).  Russia is an energy export country, and so Russia’s energy geopolitical maneuver has great impact on the world.  As United States boosts its own energy export sector, it’s in conflict with Russia in the energy export market.  Meanwhile Eurozone member countries are depending on Russia for energy supplies such as natural gas.  This is a big security issue for Eurozone member countries, because Russia can blackmail Eurozone member countries into submission by raising prices or producing less energy resources.  Can the United States help Eurozone member countries to rely less on Russia’s energy resources?

Anyhow, Russia with its own geopolitical agenda can make the whole global economy a lot more complex.  It’s already happened as Russia and China signed the $400 billion natural gas deal.  With this deal Russia will not have to worry about too relying on Eurozone member countries for natural gas export.  As Ukraine conflict continues, United States and Eurozone member countries continue to sanction Russia.  Returning the favor, Russia cuts more ties with the United States and Eurozone member countries.  With these economic sanctions between them (e.g., Russia vs United States and Eurozone member countries), the outlook for the global economy might be dampened by a lot.  Meanwhile Japan, Philippines, and Viet Nam are in territorial disputes against China.  China might play hardball and sanction these countries.  If the tension between these countries against China are not dying down, the global economy as a whole might get even worse.  Simply put, there are way too many uncertainties and moving parts for the author, James Rickards, to be certain that Eurozone will be able to reform without issues.  Without reforming appropriately, the Eurozone will not be able to perform.  If things got really bad, the Eurozone might even see the collapse of the Euro.  This is why China isn’t exactly put all of its eggs into the Eurozone.  Although China is cutting back on the buying of the United States’ treasury bonds, China isn’t exactly cashing out all of United States’ treasury bonds.  It means that China is still hedging between the United States’ dollar and the Eurozone’s Euro.

In summary, I think the author is too bullish on the Euro even though the Eurozone isn’t exactly doing too well at the moment.  If the Eurozone fails to reform as how James Rickards had advised in “Death of Money: The Coming Collapse of the International Monetary System” book, the Euro may suffer great setback.  Furthermore, Ukraine conflict might add more energy, economic, and political issues for Eurozone to be dealt with.  If the United States sees the Euro as the potential rival for the dollar’s currency reserve status, the United States might not want to see the Euro rise.  China might not want to see the Euro rise also, because this might dampen the potential for the Yuan to become the sole reserve currency.  Nonetheless, what if the Euro rise will happen anyway and China will insist the Yuan to become another reserve currency?  This will be very problematic for the United States for obvious reasons.  One noticeable reason would be the world will use the dollar even less as the reserve currency, and this will make it harder for the United States to print more dollar to pay off debts.  In a nutshell, the global economy is a mess and a battlefield, and James Rickards might be very wrong for being too bullish on the Euro.