Dutch traded guilders for drachmas

22nd July 2003, Comments 0 comments

Dutch traded guilders for drachmas

The Dutch made two very bad deals in the last millennium. The first was trading New York for Suriname, proving that you can never underestimate Donald Trump for improving property values. The second was joining the euro.


Don't get me wrong, I love being able to jump over to Belgium, France and Spain without having to learn to recognise (and spend before I leave) an entirely new set of coinage. But when I look at my euros, pretty as they are with that nice map which in a strange, Orwellian way omits non-EU Norway, I wonder exactly what they’re worth.

The answer is that they’re worth exactly the same as the countries standing behind them. That’s good if we’re talking about Luxembourg or, up to recently, the Netherlands. But put Greece, post-unification Germany and Portugal in to the mix and, well, it starts to look a bit of a mess.

Portugal is a good example of what’s going to happen. Earlier this year it announced a budget deficit for 2001 of 4.1 percent. Two important points about that: one, the figure is a full 35 percent over the Maastricht treaty limits; two, nobody knew about it until after the fact.

The second point is the killer. The Maastricht limits are designed to maintain stability and promote confidence in the euro by limiting national budget deficits to 3 percent of GDP. If everyone follows, the euro remains strong. If one country cheats, and the others find out, it could be subject to a big fine. But if one country cheats, and doesn’t get caught, it benefits from the price stability and confidence of the euro while getting to spend more money than it is legally permitted. It is a simple matter of maximizing outcomes.

It gets better. Game theory – and Economics 101 – tells us that in this construction, all the countries will cheat, and they will do so surreptitiously under the assumption that each of them is the only one cheating. In reality it’s even worse than that, because tough economic times have put economies in a straight jacket where they cannot raise tax revenues but, arguably, need to run some short-term deficits: that is, they must cheat. And it will work as long as it doesn’t become evident to outsiders what is actually going on.

That could be a long time. It is instructive to look at American states, which are by law not allowed to run budget deficits but in fact do so all the time, most recently in New Jersey where the state lost $22 billion gambling in the stock market, according to the New York Times.

Canadian provinces are even more creative, having mastered Enron-style accounting techniques that put deficits into theoretically private companies where the government, off-balance-sheet, guarantees the debt. If you add up all the budget deficits of Canadian provinces, they are higher than that of the federal government. No need to ask why the Canadian dollar trades at $0.62.

In the eurozone, deficit cheating is much easier due to the abstruse layering of governments and, as we’ve already seen between Germany and Portugal, the readiness to make gentlemen’s agreements to overlook budgetary peccadilloes. If the euro is worth what the countries behind it are worth – and those countries are mired in hidden debt – well, you get the picture. Germany, France and Italy have all said in so many words that they are not going to be constrained by what the EC president himself said is a “stupid” stability pact.

It took about seven years for the markets to realise the smoke and mirror game of the 1990s boom. Sooner or later, the markets will realise that eurozone countries have, as corporate gamesters like to say, “unaccounted-for liabilities”. When these liabilities come to the fore, the euro will go down, down, down.

So enjoy this bit of sunshine we’re getting in Euroland; fly over to ex-Dutch New York City to spend them while you can. Sure, with all the troubles in the US, our little map-coins may reach as high as $1.10 by the first quarter of 2003. But in the long term, a seventy-five cent euro — or even sixty-five cent euro — is probably where we’re headed.

That’s six bits. If we’re lucky.

November 2002

Kevin Lowe is a Canadian expatriate living in Amsterdam.

Subject: The value of the euro

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