The ToniKröger

Mrs. Buce does not pay a lot of attention to financial news but like the rest of the world, she cannot evade the Cyprus kerfuffle. She's coming around to the view that there really two Eurozones, one for Huns and Vikings, the other for those excitable southerners.  It's like one soul trying to claw its way out of another body (think Steve Martin and Lily Tomlin).  Or perhaps one body comprising two souls, like the divided souls of Thomas Mann stories,  in particular the one about Tonio Kröger, the lad with the northern-banker father and the Italian-artist mother

Mrs. B suggests that it is time, maybe not to split the Euro in two but perhaps to recognize the duality of the  system by conferring a more suitable name. She would suggest "the Kröger," but rejects it because people might confuse it with the Krugerrand which is something altogether different. She thus lights on "the ToniKröger." I point out that for correctness she really needs the extra "o." She grants the point but responds that five syllables would be too many and that anyway, if she added an "o," people would think it Irish.

Greece: Thinking the Unthinkable

Best recent summary of what's up in Greece: link, where we learn that a departure from the Euro might lead to an 80 percent drop in value of a new drachma against its departed comrade. Meanwhile I hear that you can buy a Mercedes for taxi service in Athens at a discounted price of €30,000. I assume that this means that the devalued price would be 150,000 drachmae? Unless, perhaps, the sellers of Mercedes taxis decided they had to shave a little off the top to keep the business (for you only, 147,000 drachmae, my best price!)?  This seems to me we should all be stocking up on Greek taxis--but no, wait, if  what I say is true, then somebody has already done it.

We also learn that the pre-crisis street price of an Athens taxi license was €150,000. (you could pass them down in the family, like a priesthood of Dionysios). A reforming Greece was supposed to do away with the Greek license raj, but with numbers like this I wouldn't hold my breath: few things can bring a nation to its knees quicker than an army of enraged taxi drivers. My puzzle is: would a post-departure taxi license find its price pegged to the Euro and so leap to 750,000 drachmae? Or is does it subsist in an internal market where a lower price might be indicated?

Meanwhile I hear that tourist business in the Greek Islands is growing again this summer—but that traffic on the mainland, including Athens, is falling flat. The Germans in particular are said to be giving the place a wide berth.  Given what I read, it is hard to blame them.

How Will it All End?

What Exactly happens when a country withdraws from a currency bloc? The Economist has the best tictoc I've seen:

If a messy default is forced upon a euro-zone country, it might be tempted to reinvent its own currency. Indeed, it may have little option. That way, at least, it could write down the value of its private and public debts, as well as cutting its wages and prices relative to those abroad, improving its competitiveness. The switch would be hugely costly for debtors and creditors alike. But the alternative is scarcely more appealing. Austerity, high unemployment, social unrest, high borrowing costs and banking chaos seem likely either way.

The prospect that one country might break its ties to the euro, voluntarily or not, would cause widespread bank runs in other weak economies. Depositors would rush to get their savings out of the country to pre-empt a forced conversion to a new, weaker currency. Governments would have to impose limits on bank withdrawals or close banks temporarily. Capital controls and even travel restrictions would be needed to stanch the bleeding of money from the economy. Such restrictions would slow the circulation of money around the economy, deepening the recession.

External sources of credit would dry up because foreign investors, banks and companies would fear that their money would be trapped. A government cut off from capital-market funding would need to find other ways of bridging the gap between tax receipts and public spending. It might meet part of its obligations, including public-sector wages, by issuing small-denomination IOUs that could in turn be used to buy goods and pay bills.

When cash is scarce, such scrip is readily accepted by tradesmen. In August 2001 the Argentine province of Buenos Aires issued $90m of small bills, known as patacones, to employees as part of their pay. The bills were soon circulating freely: McDonalds even offered a “Patacombo” menu in exchange for a $5 pata c ón. Argentina broke its supposedly irrevocable currency peg to the dollar a few months later.

Scrip of this kind becomes, in effect, a proto-currency. In a stricken euro-zone country, it would change hands at a discount to the remaining euros in circulation, foreshadowing the devaluation to come. To pre-empt further capital outflows, a government would have to pass a law swiftly to say all financial dealings would henceforth be carried out in a new currency, at a one-for-one exchange rate with the euro. The new currency would then “float” (ie, sink) to a lower level against the abandoned euro. The size of that devaluation would be the extent of the country’s effective default against its creditors.

Market gurus and other students of misaligned stock, bond or home prices often say that although it is easy to spot an asset-price bubble, it is impossible to know the event that finally pricks it. In much the same way, the likeliest trigger for a disintegration of the euro is unknowable. But there are plenty of candidates. One is a failed bond auction that forces a country into default and sends a shock wave through the European banking system. Italy has €33 billion of debt coming due in the final week of January and a further €48 billion in the last week of February (see chart 3). Since bond investors are turning their noses up even at offerings from thrifty Germany, the odds against Italy’s being able to raise the money it needs early next year are uncomfortably short.

Another danger is a disagreement between Greece and its trio of rescuers (the EU, the IMF and the ECB) over the conditions of its bail-out. The risk of a mishap will be greater after the Greek elections in February if the country’s political mood sours yet further. Perhaps the spark will come from another source: the bankruptcy of a bank; fresh trouble in Portugal; or a chain of events that starts with France losing its AAA rating and ends with runs on banks across Europe. The exposure of French banks to Italy and to other countries that have been in bond traders’ sights for longer implies that contagion would quickly spread to the euro’s core (see chart 4). Widespread defaults in the periphery would wipe out a big chunk of Germany’s wealth and begin a chain of bank failures that could turn recession into depression.

The few left in the euro (Germany and perhaps a few other creditor countries) would be at a competitive disadvantage to the new cheaper currencies on their doorstep. As well as imposing capital controls, countries might retreat towards autarky, by raising retaliatory tariffs. The survival of the European single market and of the EU itself would then be under threat.

Link. The Economist ends its rosy scenariising on an encouraging note: "Such a disaster can still be averted."  From your mouth to God's  ear.  

How Mrs. B Saved the Euro

Do you notice a wave of benignity and civic virtue sweeping over the European Union?  Not just yet?  Well you will soon, and I'll tell you why.  Travel back with me in time a few days to Volterra in Tuscany, where Mrs. B is at the bar in the stand-up coffee shop, enjoying her daily pick-me-up.  Chap with an American accent fetches up next to her.

--Uh, coffee?  

--One-eighty.

The customer spills a small handful of change onto the bar and starts counting coins aloud.

--Uh, fifty.  Seventy.  One hundred.  One Euro.  No, ninety.  Plus forty is....  Uh, I don't think...

Now Mrs. B, whose virtues include charity but not always patience, dips her fingers into her own stash of change and tops him off with 50p.  The barman scoops up the whole spread and smilingly returns a receipt.

--Ah?  Oh no, I can't...

--No problem.  Buy somebody else a coffee.

--What?  Oh.  Sure.  Thank you.

Does the phrase "butterfly effect" flutter into your mind?  Anyway, you can see where this is going.  That guy, who looked a lot like a Rotarian from Cincinnati, buys somebody else a coffee.  Somebody else buys somebody else.  Maybe somebody buys two and anyway pretty soon we've got what Arlo Guthrie calls a movement, a movement.

And any day now, the whole continent relaxes  into easy understanding and all their problems are over.  Either that or they all get so buzzed on coffee they can't do a thing.

Oh wait...

Why Not Accept Euros?

Mark Perry raises his eyebrows at the news that they are accepting Euros at liquor stores in the East Village (link).

Okay, granted, he caught my attention, too. But on second thought, why not?

I suspect the correct response depends on your view as to why the retailers are taking Euros. When I was in Turkey in the early 90s, the locals were desperate for dollars, Deutschmarks, Swiss franks, even Italian lira--anything to get themselves out the inflation spiral that governed Turkish currency for so long: better to have the foreign currency than to have to run to the bank.

On the other hand, anything is a worth dollar (or a Euro) at the right price. In this age of free convertability and ready access to the facilities of exchange--and of ready-configured conversion cash registers--it really shouldn't matter: or at any rate it is nothing more than a little teaser to the customer, like the bowl of mints at the hostess podium. In five-star hotels in India, my impression is they'll take any of a half dozen currencies at the market rate, and with little or nothing by way of exchange ripoff in the process.

My guess is that for present purposes, we are Indians and not Turks. But I have to admit, I stopped to read his blog post.

Afterthought: I wasn't there, but I am told that in Slovenia in the early 90s, they got shirty about foreign currency, especially Deutschmarks. "We have our own currency now," they would say. A matter of national pride, I suppose. I assume there are motel operators in West Texas who will insist on the dollar as a matter of national pride, but mine doesn't run that far.

Update: FP falls for the weak-dollar explanation (link). And fn to FP: coins don't crumple.

Can We Join The Euro?

Seemed like every morning on our late European excursion, we were greeted with news of a new low for the dollar against the Euro. I guess what goes around comes around: I lived in London in 1976 (on an American paycheck) and as the pound fell against the dollar, I got a ten percent pay raise every month.

But it does prompt me to speculate: can’t we just join the Euro and be done with it.

Purists will cavil that we aren’t a member of the European Union, but I don’t see why that should be a deal-killer: if the Moldavans are on track to claw their way into the Union, you think there’d be some way to make room for us.

A more serious objection might be that we would have trouble with the fiscal integrity standards, given our penchant for spending money like drunken sailors, without showing any inclination to pay our debts. Remarkably, the fiscal standards seem to serve as a barrier to entry; apparently once you are in the Euro, you can do anything you damn please.

Short of actually joining, of course there is an easier route: we could simply peg our currency to the Euro. It’s a recognized strategy for weak or marginal economies, and I can’t think of any good reason why we shouldn’t take advantage.

Meanwhile, we came home to find we were holding about $140 worth of unconverted Eurocurrency. Our first impulse was annoyance. But then we reflected that we are due back in Europe again next may. The way things are going, this currency stash may turn out to be the best investment we’ve made this year.