by Horace Lewis-Roberts
With the rise of Bitcoin and general hostility towards so-called fiat currencies, notwithstanding the euroskeptic animosity towards the euro, many people are speculating about the ultimate demise of the euro. However, as French politician Marine Le Pen recently intimated to Der Spiegel, the euro is something of a German creation.
In essence, the euro represents a reincarnated Deutschemark, with bits of Dutch guilders and Belgian francs thrown in. Ever since French Finance Minister Pierre Bérégovoy decided to start fighting inflation in the German style during the 1980s, France also acquired a hard currency hitched to the Deutschemark, leading to the equation Germany + Benelux + France = one European currency. The French almost succeeded in smuggling a very old Gallic monetary unit, the écu, in as the ECU (European Currency Unit) but somehow the ploy did not succeed and today we know it as the euro, officially known to fx traders as the EUR. The public at large have got used to the symbol €.
And let’s not forget about Austria which also joined the monetary Anschluss with aplomb, ditching the Austrian schilling on 1 January 2002 when the euro started to circulate officially in the so-called euro zone.
Even if all the countries in Southern Europe had to go back to trading in their national currencies, the biggest part of the European Union, economically speaking, would still be using a unitary currency. The combined GDP of Germany, Austria, France and the Benelux countries is $7,75 trillion, whereas the total euro zone GDP equals $12,7 trillion. So we see that the original European currency club whose currencies first started to converge in the 1980s constitutes 61 percent of the euro zone’s GDP. If Italy is thrown in, it goes up to almost 77%. Italy has a large economy worth just over $2 trillion of annual GDP. During the dying days of the lira, Italy too started to seriously converge toward hard-currency status, similar to its transalpine neighbours. Parts of Northern Italy are really no different to Germany, with medium-sized businesses being heavily oriented towards exports of specialised machinery and consumer goods, including gold jewellery.
Talk in the British financial press of the “Club Med” countries who are out of sync with Germany and neighbours to the north-west is therefore of no real consequence, as any currency trader knows. Betting against the euro has been, for the most part, like going short the old Deutschemark or Swissie against the dollar, a long-term losing trade if ever there was one.
There are only two really liquid currencies in the world today: the dollar (USD) and the euro (EUR). Traders at the major currency banks like Citi, Deutsche, HSBC, JP MorganChase, UBS and others usually make a market in the EUR-USD pair in “half a yard”, i.e. half a billion euros that may be traded in a split second.
The recent hostility of the USA towards French and Swiss banks like BNP Paribas or Crédit Suisse has probably not been lost on Europeans in general. If ever the world had to go back to a dollar-only system, America could dictate terms (and gargantuan fines!) to everyone else.
So, love it or hate it, the euro is here to stay. If there had been another strong currency in the world, perhaps its future would have been less certain, but given long-term dollar weakness, it is the US currency that may unravel some day in the not too distant future. America has simply accumulated too many huge deficits, including budget and trade deficits, for the dollar not to depreciate over the long haul.
Probably the most stable currency in the world is the Swiss franc (CHF). However, despite Switzerland’s economic prowess and major role in banking, a country of 7 million people will never provide us with a global, tradeable currency.
The size of the global foreign exchange or FX market is $5,3 trillion per day. That is according to the Bank for International Settlements and the global results from the 2013 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity.
The EUR/USD (about 33% of all trade by volume) is the most actively traded currency pair by far, followed by the GBP/USD (13%) and USD/JPY (12%). Together these pairs alone account for 58% of all forex trade by volume. In their other possible combinations, EUR/GBP (4%), EUR/JPY 2%, GBP/JPY (1%), they account for about 65% of all forex trade.
Taken individually and looking at all the estimated trading volume of all the pairs these typically trade in, the USD is involved in over 71% of all forex trade, the EUR in about 41%, the GBP in about 18%, and the JPY about 16%.
We see then that the euro, while not having the privileged position of the dollar as a reserve currency, is nonetheless the only currency that may rival the dollar in the global currency market. If ever US military adventures in the world could turn a sizeable number of nations against it, the dollar could start to suffer as the preferred medium for oil and other commodity transactions. The only other currency that could remotely replace it as the world’s leading currency would be the euro.
Long-term dollar weakness driven US deficits represent the prime reasons why investors and foreign central banks may eventually lose their appetite for the greenback.