Since the official start of the global economy in late 80’s, we have witnessed the rise and burst of several bubbles—in fact bubbles have been a component of globalisation. The new economy and the dot.coms, then the commodities, the real estate and finally the currency markets. Globalisation and the digital revolution have made available for banks and other investors huge amount of money to be moved quickly. So, banks (among others) stopped doing the traditional banking job and became speculators. The value of companies, commodities, etc. was not anymore linked to the normal process of demand and supply but to broker intervention. This had a dramatic impact on the (economic) life. Companies had to deal with this phenomenon and so did everybody else. Imagine oil moving in the space of a few years from $80 to $140 and back to $60 and then to $100, what impact might have had on company’s pricing policies, on inflation in general and on consumers.
The latest addition to the speculation chain was the currency bubble. And, the Euro was a relatively easy target. The European currency in its conception was meant to be pegged to the US Dollar, but after a slow start, it went well beyond the parity hovering above 1.20/1.30 with peaks at 1.5 before the 2008 crisis. The Euro was not created to be devalued: the role of the ECB, which had to only combat inflation with no possibility to print money, the German primacy in influencing the EU monetary policy (whose cultural aversion to inflation is deeply rooted), the lack of political integration among Member States, and the relatively high interests compared to USA and Japan made the Euro an attractive currency to create a bubble. Another indicator that the bubble was in development was that despite the Euro revaluation, the economy in the EU has been growing less than in the US and Asia.
Devaluation can be good. When you are in the midst of a bubble, it can help cool down markets and reach a better equilibrium. It can also help the economy by making your exports more competitive. This is what it has done in countries like China, Switzerland, and US. These are all very respectable States. Today, in the middle of the Euro crisis, we must devalue- it’s only a question of when. The discussion to give power to the ECB to print money to buy the member States’ debt at low interest rates is exactly that: devaluation, using a convoluted language. The austerity measures to reduce the debt are going to be useless, as long as the money will come from the market, because the market in one day can send interest rates soaring through the roof and render all the sacrifices to no avail, swamped by the higher rates.
There are many arguments against devaluation, and in normal circumstances are valid. One is that it creates inflation. This is true. But there are a few considerations to be made in these crises circumstances. First, the alternative of gigantic austerity, high interest rates and collapse of the banking system are even less desirable circumstances . Said another way, the money that inflation is going to take from people will be generally less than the combination of taxes, high rates to be paid to banks for mortgages and credit and lower levels of public services. Second, we could argue that the impact of the inflation will not be huge considering that EU is the largest trading area in the world, and that a large portion of EU commerce comes from within EU. Third, it will send the strongest possible signal to the markets that new bubbles will be faced, with injections of money at low interest rates—and that is probably most scary for them.
There is an ideology that says that Italy, Greece and Spain deserve all this because of their huge public debt. I believe that it’s only part of the truth. As an Italian, I believe that the problem for us is not just the debt-however big—as after all the US also has a huge debt (as do so many other countries). Our problem is that we squandered the money, as instead of building infrastructures, investing in education and in the health system we have created a mammoth bureaucracy that eats the country’s wealth with unproductive expenses. So, Italy deserves the bad things that are affecting it, but for different reasons, and can never fix the debt without growth allowing to redeploy people in the public service to other more productive sectors. This won’t happen with austerity packages alone. And that will require access to low cost borrowings, … and good politics (for once) in Italy.
Roberto Marinucci is a businessman who has worked for international corporations and has a career spanning over 25 years. He has worked in South Africa, Egypt, Belgium, Switzerland and Italy and is contributing writer to business and sustainability journals in Italy.
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