Oscar Wilde, chess players and the Euro

Oscar Wilde once wrote: ‘There are only two tragedies in life: one is not getting what one wants, and the other is getting it’.

A strategic thinker is one who is able to connect the dots between apparently unrelated events and think many moves ahead, thus calibrating his moves to at least minimise immediate damage and ripe benefits in the future. The typical example outside the battlefield is a chess player: it is said that the very best can see 20 or more moves ahead.

Most of the comments made by German officials since the start of the crisis have been unfortunate for the seeming incapacity to see even 2 or 3 moves ahead.

One of the latest, however, deserves the Oscar, not least because it was expressed in written form, and can therefore hardly be open to misunderstandings.

Michael Meister, a senior member of Merkel's party, wrote on Twitter: "no one is preventing Hollande going ahead with joint bonds for France and (Italian Premier Mario) Monti for Italy."

Seemingly not a chess player, it is probable that Mr Meister has also failed to connect his brain before getting online. Had he done so, he would have been able to think some moves ahead and get to the logical conclusion that a joint bond issuance of any group of countries within the Euro but excluding Germany would have.

 It is by now clear to most that the German balance of trade is in surplus largely because of the advantage of an undervalued currency. Indeed, if Germany were to return to the Deutsche Mark, the new currency would increase 30-40% on the Euro according to some conservative estimates, thus wiping out (with probably plenty to spare) the trade surplus more or less overnight.

We can suppose Mr Meister knows this, as it has been widely reported in the press for several years.

If European countries, excluding Germany, were to issue joint bonds, it is not too far-fetched to assume that this would be done under condition that they, and they alone, share the same currency. In other words, this would imply either that said countries leave the Euro or that Germany, willingly or more probably not, would be shown the door.

This scenario could play out before or after the issuance, but either way it is the most probable outcome of the event Mr Meister is advocating.

Italian Prime Minister Monti, one of the few international leaders who understands economics, answered indirectly during a TV show, saying that all stand to lose from a dissolution of the Euro, but Germany stands to lose the most, as Italian exports with a competitive currency would be trouble to German firms. It is exactly as simple as that: Italy has a positive primary balance of trade, which means it exports more than it imports. The balance of trade is only negative because of debt interest payments. Truth is, Italy would export a lot more with a cheaper currency. It would also pay more for its imports, but also benefit from inflation effectively lowering debt burdens in real terms. Before anyone thinks leaving the Euro is a good idea for Italy, please consider that it would come at the cost of bank and business defaults and everyone (but debtors like the State) would be made poorer by inflation (see previous post: http://linesofanalysis.blogspot.it/2011/12/reductio-ad-absurdum-why-euro-will-not.html).

Populist comments like Mr. Meister’s are most probably made not so much because of ignorance of things economic (if we know the numbers in Tuscany and Milan, it is obvious they known them in Berlin and Frankfurt, even if most politicians are lawyers with limited understanding of figures), but most probably to assuage the mood of the Germans who, because nobody took the time to explain them how the numbers look, want nothing more than their old Deutsche Mark. To this, Oscar Wilde’s quote is very appropriate: it would be a tragedy indeed, mostly for them as jobs would disappear with their hard-earned competitiveness, to get what they want. Or Merkel can do her job and explain the numbers to her constituents.