By Jean-Pierre Avermaete, June 9, 2017 (Translation by ‘Google Translate’)
Why the Euro is not that single currency we think he is.
Since January 1, 1999, the euro has been used. 23 countries (1) use this currency as a single payment instrument today. They form the eurozone, an apparent monetary union. The European Central Bank (ECB) supervises this union. Officially, she regards the currency’s creditworthiness. Everyone is convinced that the euro is a single currency, as the dollar is one in the United States, managed by one central bank. Specialists prefer a common currency because the currency is used as a common currency. However, the euro is neither. It is the collective name of a series of national coins, of 21 different euros (2).
Just explain how this came about. The idea of a single currency arose during the Second World War. The concept only took a more concrete form in the drafting of the Maastricht Treaty. One country, however, opposed that idea: Germany. Why would that country indeed sacrifice its immense market for a coin of which it did not last longer? But how can you increase the cohesion between the former member states of the European community without using the same currency? A common reference currency such as the ECU, the unit of account that was used as reference at the time of the European Monetary System between 1979 and 1993, proved insufficient. This does not prevent exchange rate fluctuations.
It was thought of an ingenious system that had to create the impression of a full monetary union with an apparent single currency, so that the existing national coins did not endanger. That system shows its fundamental shortcomings today. What did the designers think of? Firstly, they suggested a name for the euro . Each national currency that participated in the unification had to change its name. The Belgian franc was thus renamed to euro, like the French franc, the Dutch guilders, the German mark, etc. Secondly, their intrinsic value was adjusted to create the impression that all those national euros were equivalent and thus mutual Interchangeable. For the Belgian franc the ratio of 1 euro to 40.33399 francs was applied. Each Member State acted in the same way and on January 1, 1999, all national euros were completely interchangeable without any exchange rate difference.
If one had a true single currency, then the ECB was the only central bank responsible for this. The national central banks would then act as a branch of the ECB without any other powers. Now it appears that all national banks have retained their powers. Although the ECB determines monetary policy, the national banking system is still under the guardianship of the national central banks, with their own approach. A specially created payment platform, TARGET2 (Trans-European Automated Real-time Gross Settlement Express Transfer), had to allow the coherence of this system. Since 2008, a second version of it has been working. This platform settles approximately 345,000 transactions on a daily basis of approximately 1,800 billion euros. 55,000 financial institutions make use of it.
If one had a real monetary union with a single currency, then such a platform would be completely useless. The ECB would have assigned that task. The presence of TARGET2 and the fact that the NCBs have retained their powers prove that there are several euros in circulation. This is clear by means of a simple example. Suppose you purchased a product from an Italian manufacturer. You must arrange the invoice by bank transfer. You will instruct your bank to transfer the amount to the Italian bank indicated by the producer on his invoice. For you the stocking is off. In fact, the transaction takes place in a different way. You will find a description of this on the ECB site (3). You will learn that your bank acted through TARGET2. Both the Belgian and Italian banks are indeed members of TARGET2 and can directly transfer mutual funds. At least it has been proposed. However, that description is incorrect. Probably to keep the shine high that only one euro is in circulation.
In fact, the transfer is carried out with the intervention of the two central banks concerned, the National Bank of Belgium (NBB) and the Banca d’Italia. Your Belgian bank will transfer your payment order to the NBB where they have a current account. The NBB will debit that bill for the transferable sum and the current account of the Banca d’Italia credited to it. At the same time, the NBB will inform its Italian colleague of the transaction via TARGET2. After which the Banca d’Italia will debit the NBB’s current account in its books by credit of the Italian bank’s current account, thus receiving the money for the benefit of the Italian producer. Thus, your transfer has caused a wide range of accounting procedures without effectively transferring funds.
Due to your payment, the NBB is now blamed against the Banca d’Italia, while the Banca d’Italia has a claim on the NBB. This has, however, far-reaching consequences. As indicated, the transferred sum is still in possession of the NBB but only in control for the benefit of the Banca d’Italia. The statute of these transferred euros has changed. They no longer belong to the NBB, although they are still with her. It means that the NBB no longer holds the creditworthiness of these euros. This task has now been taken over by the Banca d’Italia. The latter therefore covers the euro concerned. If the Italian producer removes the euro from his account, his Italian bank will hand him the euro, euros provided by the Banca d’Italia.
This payment system has not caused significant problems to break the current crisis, which arose in March 2007. Within TARGET2, debt and receivables are always in balance, but their distribution is weak. Due to the current crisis and the lack of credibility with which the European authorities are facing it, some of the weak Member States’ capital flew to the stronger. With the eyes of members, the central banks of Germany, Luxembourg and the Netherlands saw capital flowing steadily in the form of bank transfers, capital they had to cover without really having them. Article 63 of the Treaty of Lisbon leaves the capital movement within and outside the eurozone completely free.
By the end of April 2017, the Bundesbank thus had claims amounting to no less than 843.4 billion euros (4). This amount corresponds to just over a fourth of the country’s GDP! The vast majority of these claims come from the southern Union’s problem countries, such as Italy, Spain and Greece. The Banca d’Italia is blaming its eurozone counterparts at most EUR 411.6 billion, the Banco de España 366.4 billion, the Greek central bank 76.9 billion. Amounts that can not be redeemed by these central banks. By comparison, the NBB is € 17.3 billion in chalk. Should a country like Italy decide to withdraw from the eurozone, it would have to expel 411.6 billion euros immediately to compensate creditors. In addition, she should collect a little less than 100 billion to repay part of the banknotes received from the ECB. The Peninsula would have to cough up about 500 billion euros immediately. An impossible task.
The Bundesbank’s situation does not look great either. The Bank knows that it will see little of these progress. However, she remains responsible for those amounts because they are on accounts with German banks and can be requested by the account holders at any time. Cautious Italian investors, for example, who want to secure part of their patrimony will be inclined to open an account with a German bank and transfer that part to it. Thus they change the status of their euros. Their funds are no longer Italian, but German. If the euro zone splashes with a return of national coins, those Italian investors know that their German assets will be converted into new German markets rather than in new Italian lira, a currency that is likely to fall rapidly in value.
It is precisely this aspect that poses the greatest threat to the survival of the euro as apparent single currency. This threat also explains Germany’s stubborn attitude in European financial affairs. As long as the German government dominates European politics, the country will do its utmost to obscure this naked mischief while simultaneously obliging the other Member States to bear their share of the burden. Emmanuel Macron’s election as president of France is an enormous relief for Germany in this regard. He will never put sticks into the wheels and slaves will comply with the German orders.
The outlook looks particularly gloomy, because there is no solution for the time being. The treaties did not provide anything. Adjusting them is almost impossible because the slightest change requires unanimity. It is obvious that deficitious Member States in the TARGET2 system have no interest in leaving the euro. And nobody can chase them out. By maintaining the euro, they commit the European authorities to helping them. If it were not possible then they will unpay those debts unpaid. As a consequence, those transferred euro should be fully covered by the other Member States. What exceeds their level of support for now.
A complete review of this system is urgent, coupled with the establishment of a true banking union and the consolidation of sovereign debt at European level. There is no other way out. But the way in which the competent authorities behaved in the past is the worst to be expected. The euro will be from one crisis to another, and each crisis will be worse than the previous one and lead to measures which will show the feasibility. The way in which the European institutions, the ECB and the International Monetary Fund (IMF), the so-called Troika , addressed the Greek and Cypriot issues. It became and is still a mess. However, it provides additional proof that all euro’s are different.
Indeed, in violation of the requirement contained in Article 63 of the Lisbon Treaty, which guarantees free movement of capital, neither the Greeks nor the Cypriots have free money. The authorized transactions in euros are limited. Worse, the access to their bank credit is limited and they can only get out of cash with a small amount of money. All in violation of the prevailing treaties. Greek and Cypriot euros are thus less accessible than their foreign names, although they remain completely interchangeable with all others. Experts will tell you that this is due to the plight of the Greek and Cypriot banking industry. Totally nonsense. It is about changing the statute of cash as soon as it ends in the banking circuit. However, this is another story that is being called another time.
(1) Andorra, Belgium, Cyprus, Germany, Estonia, Finland, France, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Monaco, Netherlands, Austria, Portugal, San Marino, Slovenia, Slovakia, Spain and Vatican City.
(2) Of the 23 countries there are 4 who do not have their own currency: Andorra (Spanish Peseta), Monaco (French franc), San Marino and Vatican City (Italian lire). 19 countries changed the name of their currency in euro. In addition to these homonymous euros, there are two additional ones, namely those directly issued by the ECB, plus all passports, banknotes and coins that have their own status.