Ambrose Evans-Pritchard, who currently covers economic issues for the Daily Telegraph, wonders whether the €uro zone, faced with a possibly ruinously high exchange rate for the single currency against the dollar and some other major currencies, will embrace the “nuclear option” of imposing exchange controls to prevent the euro rising much further. Evans-Pritchard wonders whether such thoughts are idle. I think he is right but is also right to ponder this issue. If, in order to protect the likes of Airbus and other big exporters, the EU were to halt or control inflows of capital to the euro zone, the impact on places like London, the world’s largest forex market, would be devastating. Tens of thousands of jobs in the money market business would be lost. Such controls would further hammer any idea that the EU had, or ever has had, much to do with free trade. It would set back the cause of global free markets for years. Some defenders for exchange controls might try to argue that they would be less bad than higher tariffs on imports to the EU, but there are plenty of those tariffs already.
The general popularity of the euro at the moment is more because it is – temporarily – seen as a more reliable store of value than the dollar, rather than because of a new-found belief in in the economic prowess of Germany, France, Italy or Spain, for instance. With a large budget and current account deficit, the US has been letting the buck drop to make its exports more competitive overseas and as a result, the euro and the pound have risen, making it cheap for Brits to take their holidays in the States, for example. There is some sign that this exchange rate movement is working (I am actually pretty bullish about American exporters for the next year. I am actually quite upbeat about the US economy, which is always written off, with a hint of anti-American bias, by the usual commentators).
I do not think the EU will embrace exchange controls; such a move would be hugely controversial and unlikely to succeed. Prophets of doom would do well to recall that West Germany, back in the 1970s, lived quite successfully with a strong deutschemark; there is nothing axiomatic about why the EU cannot cope with a strong euro, at least not in the short run. The more fundamental problem, of course, is whether the countries making up the euro zone should have joined it in the first place, given their different characteristics. I think the euro could be a disaster for some nations, or at least a very painful experience. My wife’s country, Malta, is about to join the euro next year. Thank god it does not have a big export market.
I do not think that the E.U. will impose exchange controls – this side of a world economic crises.
And what would be the point of such controls anyway. The Euro is a fiat currency – having lots of Euros taken out of the E.U. does not mean much.
As for Airbus:
It is a political project and defence sales by American aircraft manufacturers are NOT the same as the subsidies that Airbus gets.
It is farce but its political nature is its strength – for example the French President just went to China and sold lots of Airbus product to the Chinese government.
The deal made no commercial sense – but it made a lot of sense for the Chinese on death-to-America grounds (when will Americans understand that the destruction of the United States is a long term strategic objective of the People’s Republic of China) and lots of sense for the French on save-jobs-Toulouse grounds. Although the Chinese are asking for a stake in Airbus and production may be shifted their eventually.
It is much the same as the E.U.- P.R.C. “Galileo” project – which to the E.U. is a harmless way of tweaking Uncle Sam’s tail – and to the P.R.C. is part of their space war plans.
Different objectives do not prevent people working together.
Still back to exchange rates:
I can see a good reason for the high exchange rate of the Swiss Franc.
Swiss money supply growth has been lower than that of the United States Dollar for years – so whilst the present exchange rate may be a little high the run up has not been without good reason.
But the Euro?
Has Euro money supply growth rate really been a lot lower that that of the U.S. Dollar?
I doubt it.
I wonder how prices (for good and services) in the Euro Zone and the United States compare – in the end the real price parities will be determined by relative money supply growth rates, and that will (again in the end) determine the long term exchange rates.
Some places are just “high price” places (like Switzerland with all the rigging of the retail market) – but somewhere the size of the Euro Zone?
By the way the British Pound exchange rate to the United States Dollar is clearly silly.
It is a political project and defence sales by American aircraft manufacturers are NOT the same as the subsidies that Airbus gets.
No, the Airbus subsidies are more honest for a start.
It just makes the accounting more “blurred”. Take, for example, the composite work that Boeing did for the US military as Cost Plus and similar projects and were able to then more that R&D into the civilian space on projects such as the 787. Not only are they able to reuse the R&D but they kept the kit the military paid for which they can use for non-military purposes. Good business if you can get it and pretend it’s not a subsidy.
There’s plenty more like that.
for example the French President just went to China and sold lots of Airbus product to the Chinese government.
Happens all the time. My favourite Boeing moment, well, one of many actually, back when I worked in aerospace, was buying back a complete shipment of Airbus aircraft as part of a deal to sell Boeing aircraft.
The aircraft business is a very strange strange place.
Daveon comes to the defence of government owned Airbus.
Well I do not think I am going to die of astonishment. And a compass that always points south has its uses.
If only you were mega rich (although you may be for all I know) and unpopular, like Bill Gates, then we could use your support for leftist causes to divide (and confuse) the left and help defeat these causes.
I admit that this is a cynical way of thinking – I have been involved in politics too long.
(when will Americans understand that the destruction of the United States is a long term strategic objective of the People’s Republic of China)
Eenh.
Knocking the current #1 off the pedestal has ever been a ‘long term strategic objective’ of every government that wasn’t the current #1.
So China thinks it’s got a shot at the title… BFD. So do the Russians and the EU. In the meantime, we’re happy to sell them all the rope they want. ;-p
Blah blah blah, Airbus is bad because its European, Boeing is good because its American.
I do not have time for people who think the US is satan, but neither do I care for the reverse reaction.
As for the euro, I would not be surprised if you were not amongst those, when the Euro was at 0.8 to the dollar, to say what a crap currency it was.
I seem to recall the deutsche mark forever appreciating vs the pound and the french franc in the 70s, 80s and 90s. It did not seem to harm the German exporters that much.
It is such a simplistic argument.
Pascal.
Airbus is bad because it is a government owned thing (yes I know there are private companies in the mix – but it basically a government thing). If Boeing was the same I would say the same.
“simplistic” – I am simple man Pascal.
As for the exchange rate of the D.Mark.
You are quite correct:
German money supply growth rates were below those of the United States and Britain in the 1970’s – so, of course, its exchange rate rose (there is a lot of specualtion and froth in the currency market, but eventually “truth will out”).
However, has the Euro money supply growth rate been lower than that of the Dollar – or is the market predicting that it WILL BE IN THE FUTURE (because markets can predict correctly sometimes – after all “markets” are just large numbers of people making judgements “market forces are human choices” and most of the judgement are correct sometimes).
If the Euro money supply growth rate has not been lower than the Dollar over the last few years AND it is not lower in the future – well then the exchange rate is a bubble.
Again it is (once one discounts all the noise) a simple matter.
Why would exchange controls to affect the Eurozone necessarily impact London, being OUTSIDE the Eurozone?
I am not suggesting that the EU would not do it or not try and include (sabotage) London in the mix, btw.
p.s. China may not become No1, but they certainly think they should be. The issue is not just who is at the top, but also what they do to try and get there. China will steal all possible technology from anyone foolish enough to let them.
Roger, the reason it would affect London is that the bulk of foreign exchange transactions between the euro zone and the dollar are handled via London and New York, not Frankfurt or Paris. To take a slightly different example, the vast offshore eurodollar market of the early 1970s was handled via London (for regulatory and tax reasons I won’t bore you with). London makes a huge cut from the turnover in the trading of the euro, even though this country is not a member of the euro zone; hence, controls on such transactions will hit London hard.
End of lecture.
I should have replied to the point about “every power wanting to be number one”.
Even a hater of the E.U. like me does not believe that it wants to be number one IN THE SAME WAY that the P.R.C. regime does.
For all their faults, the E.U. leadership do not want to kill anyone, they do not think in terms of military dominance.
The leadership of the P.R.C. do operate in this context.
There is a big difference between being very irritating indeed (like the E.U.) and being an enemy (like the P.R.C.).
And nor is it just in relation to the United States.
Let us say that Britain decided to leave the E.U. – the top people in this thing would jump up and down and try and do lots of very irritating things.
But they would not kill anyone.
I’ve been wondering about this for a while and your post brings several things into focus, Jonathan, so thanks for writing it. I think you’re on the money here, both ways. Food for thought.
I discussed the Pritchard article with Perry a few days ago in hopes he’d weigh in since exchange rates are not exactly my thing although the current ones are clobbering me personally: since I am residing in the UK and most of my consulting customers are in the US.
The one area I can definitely discuss is the Airbus situation. Airbus was already in deep; the delays on the A-380; union problems… and then the EuroClimb comes along on top. One AIAA article I read with in the last few days says that every 10c change in the Euro to dollar rate costs Airbus a billion euro. Airbus is in an unsustainable position and in a free market it would be in serious jeopardy of going into insolvency down the road a bit. However, Airbus does not exist in anything remotely like a free economy. It is a jewel that Sarkozy just will not lose. Airbus is tied up tightly in french je ne sais quoi… Sarkozy will take any measure necessary to keep it afloat.
I think it is useful to note that EADS is busily reducing its exposure, just in case.
Paul: You really ought to stop and think more, being simple is one thing. Looking like a parody of Verity is quite another. Airbus build some good kit, as do Boeing – I’m rather looking forward to flying on an A380. I’ve flown on a lot of aircraft in my time and Airbus probably have the edge in comfort in the shot haul market – the A319s I use a lot in Europe tend to be much more comfortable and quiet than the 737s and MD80s I have to use around the US. They tend to be newer (although that might be a factor of the routes I fly).
Mega-Rich? Sadly not yet. I have hopes. I fear my “causes” would rather disappoint you.
Dale: Neither Airbus nor Boeing exist in a remotely free economy – that is sadly the nature of businesses requiring so many billions of dollars to keep them ahead of the curve. Neither sets of government would let anything happen to them, and I’ve also lived in Seattle long enough to know just how outrageous were the local tax breaks given to Boeing to ensure the final assembly of the 787 was done here and not elsewhere.
Of course, Boeing are going to have a rough year ahead of them as I suspect the “Dreamliner” is going to slip again. At least, that’s what people tell me.
It would be far more interesting if there were more players in the large jet market, but then we lost McDonnel Douglas.
You might also want to learn some manners.
You might also want to learn some manners.
Why? It’s quite obvious from Paul’s snide comments and superior tone in responses that he hasn’t.
Good point Daveon.
I have never made any secret of the fact that I regard you as lower than shit – so there is no reason that you should be polite to me. So I am on your side on this one.
On Airbus – I do not have the knowledge to judge its products.
However, I do know that Airbus should not exist.
Well Paul, it’s always nice to be honest about such things. I would find David Friedman easier to get on with if he had your refreshing honesty.
It’s amusing to be cast as a “lefty”. David Friedman tells me I’m a classical right wingish conservative while on another forum I’m being treated as an “evil” proponent of Intellectual Property rights because I don’t see why software should be free and why I shouldn’t be allowed to make money off selling something that I paid to have developed.
It’s a funny old world.
I do know that Airbus should not exist.
Hmmm… no, probably it should not. But it does, and it makes good products and, like with many things in that particular field you enter a strategic question about the necessity of such beasts. Boeing has a facade of a conventional business, but in reality it should not exist in _its present form_ either. I don’t think it’s all that healthy for the aircraft world to have 2 signifcant players and with DeHavilland getting into trouble over the Dash-8 series I fear that they’ll soon go the way of Fairchild Dornier.
Daveon: if the fact that Paul has never been rude to you personally is not enough, then how about the fact that you are a visitor here, while Paul is a resident?
Alisa: if the fact that Paul has never been rude to you personally is not enough … well, actually, as Paul will clearly say, he’s been rude to me personally on many occasions. Nothing I can’t live with, we’ve even sparred, for want of a better word, over email directly where he concluded that I was, I think, “clueless”.
I’ve even had people coming from here to my blog to be rude about me too, so that works both ways.
Paul has some strong opinions, they’re his, I think some of them, but not all, are in error and if he’s in error I’m quite happy to tell him so. He’s in error about me being a “lefty” too, as he is about Bill Gates, one of the least “left” people I’ve met, although I think he’d get on much better with Steve Balmer who’s more in line with how I imagine Paul would like his billionaires.
Daveon.
I do not remember e.mailing you.
However, I do not remember a lot of things these days – so you may well be right.
On Bill Gates:
He has a long record of funding leftist political campaigns – however he may be doing this in a, mistaken, effort to get the left off his back.
I have never met the man, so I accept he may have quite different political opinions in private.
David Friedman:
Years ago (many years ago) I had a brief spat with him over statistics (of all things).
Which just goes to show what an intolerant hothead I am.
Airbus:
Well I did say I do not have the knowledge to judge its products – and I do not.
So I will compare it to the B.B.C.
I do not maintain that all B.B.C. shows are crap – some of them are quite good.
However, a government owned broadcaster should still not exist.
Still we seem to agree on the Airbus question anyway.
On the Boeing question.
I am so reactionary I would love to see a return to the days of owner managers – but in these days of high rates of income tax, and the existance of the capital gains tax, and the death tax (neither of which corporations pay) I doubt we are going to see it.
On “hidden subsidies” via military contracts. I hope I will not be mistaken for Duncan Hunter if I say I have doubts about always buying from the lowest bidder – IF the lowest bidder manufacturers in the People’s Republic of China (a hostile power – and it is a hostile power).
I know that the British military bought a lot of stuff from Germany before the First World War (and managed to find alternative sources of supply without great difficulty), but kit is a bit more complex these days – if one loses production capacity one may not have the time (or the skills) to rebuild it.
Still the way to deal with that is to get rid of a lot of taxes (and the government spending they finance) and regulations (espeically “anti trust” and other absurdities) not to have special taxes on imports.