Currency Wars_ The Making of the Next Global Crisis - James Rickards [61]
The euro-dollar exchange rate in early 2011 was almost exactly where it was in 2007. The euro was worth $1.30 in early January 2007 and traded right around $1.30 four years later, but this equivalence should not be mistaken for stability. In fact the euro-dollar relationship has been highly volatile, with the euro trading as high as $1.59 in July 2008 and as low as $1.10 in June 2010.
The euro and dollar are best understood as two passengers on the same ship. At any given time, one passenger may be on a higher deck and the other on a lower one. They can change places at will and move higher or lower relative to each other, but at the end of the day they are on the same vessel moving at the same speed heading for the same destination. The day-to-day fluctuations reflect technical factors, short-term supply and demand requirements, fears of default or disintegration of the euro followed quickly by relief at the latest rescue or bailout package. Through it all, the euro-dollar pair travel on, never separated by more than the dimensions of the vessel on which they both sail.
The United States nevertheless has its hands full on the currency war’s Atlantic front, not in trying to strengthen the euro excessively but rather in making sure it does not fall apart altogether. The euro itself is a kind of miracle of modern monetary creation, having been invented by the members of the European Union after thirty years of discussion and ten years of intensive technical study and planning. It was the capstone of a European project begun after World War II and intended to preserve the peace.
Beginning at the end of the Renaissance in the mid-sixteenth century, Europe had been racked for over four hundred years by the battles waged during the Reformation, the Counter-Reformation, the Thirty Years’ War, the English Revolution, the wars of Louis XIV, the Seven Years’ War, the French Revolution, the Napoleonic Wars, the Franco-Prussian War, World War I, World War II, the Holocaust, the dropping of the Iron Curtain and the nuclear terror of the Cold War. By the late twentieth century, Europe was highly cynical about nationalist claims and the potential for military advantage. The old ethnic, national and religious divides were still there. What was needed was a unifying force—something that would tie economies so closely together that war would be unthinkable, if not impossible.
Starting with the six-nation Coal and Steel Community in 1951, Europe progressed through various forms of free trade areas, common markets and monetary systems. The Maastricht Treaty of 1992, named after the city in the Netherlands where it was negotiated and signed, provided for the formation of a political entity, the European Union, and ultimately led to the creation of the euro in 1999. The euro was to be issued by the new European Central Bank. By 2011, the euro was used by seventeen member states.
Yet from the start, analysts warned that a single currency backed by a single central bank was incompatible with the diverse fiscal policies of the member countries adopting the euro. Countries that had historically been profligate and had defaulted on debt or devalued their currencies, such as Greece or Spain, would be awkward partners in a union that included fiscally prudent countries like Germany.
It took ten years for all the flaws in this grand scheme to be fully revealed, although they were there from the start. A toxic combination of venal government ministers, Wall Street hit-and-run derivatives scam artists and willfully blind European Union officials