No doubt we all remember that kid’s joke: when is a door not a door? Answer, when it’s ajar.
With a tip of the hat to it being April Fool’s Day, I propose my own joke: when is a Euro not a Euro? Answer: when you can’t spend it.
This is a joke brought to you courtesy of the master comedians themselves: the ECB (European Central Banks).
The ECB promised to do “whatever it takes” to save the common currency. I want you to reread that last sentence, and let it sink in. Because there’s a flipside to “whatever it takes”, and that flipside is “regardless of consequences”. Irrespective of their severity.
I said to my dad recently: “they’re at a stage now where whatever they do, it will be the wrong decision”. Why? Because it’s like a fly touching a web; once a sticky globule is touched, from hereon in every movement, every attempt to get free from the web, simply leads to further entanglement.
Although the kernel of the idea is not my own (I don’t remember my source, sorry), I will take the original author’s idea to its logical conclusion: by imposing capital controls on moving money out of Cyprus, the ECB has created a de facto separate currency that also happens to be called a Euro. Politicians just refuse to see it as such. Note that capital controls are in direct contravention of Article 63 TFEU (Treaty on the Functioning of the European Union):
1. Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.
2. Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited.
According to the FT, however:
Article 65, however, reserves the right of member states “to take measures which are justified on grounds of public policy or public security”.
Let’s think about this for a minute. Capital can flow into Cyprus, but who in their right mind would do that? Everyone wants capital to flow out of Cyprus, but that is now blocked.
This is why I say that the Cyprus is a separate currency. In fact, it’s the worst form currency: it’s a currency that cannot be exchanged either in fixed or negotiated form. It’s a great irony that under the auspices of saving the Euro, they have actually doomed it.
I see the following scenario as possibly playing out: capital markets devising schemes of exchange through some kind of swapping mechanism. Let us call them “grey” vehicles. The ECB probably wont like the idea, because it effects the very thing that they are trying to curtail. Maybe they’ll make such trade illegal, but that’s not certain. If they do make it illegal, then a black market will emerge. It reminds by a bit of Russia when they pegged their Ruble in parity to Sterling (?) – a black market emerged in which you could obtain far more Rubles than pounds than you could through official channels.
As things go from bad to worse, imagine a scenario when the current “solution” is dubbed a “success”. This would be the most regrettable conclusion, because it would pave the way to expanding the scheme to the other delinquent countries, thereby compounding the mistake.
It’s at moments like this that I would like to remind everyone of the second-most insightful comment about economics ever written:
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
― Friedrich von Hayek
By now I hope you are wondering what the most insightful comment about economics ever written is. Are you ready? Then here goes:
Any woman who understands the problems of running a home will be nearer to understanding the problems of running a country.