Sunday, May 11, 2003

On the Euro and its Value

Frans has written from Holland picking me up on some of my arguments, especially about the 'internet conspiracy' and petrodollars stuff I wrote: I cite his argument in detail because I think it reflects a lot of thinking here in Europe on this topic, and I think it's more interesting to try and debate these things out in the open.

First of all you quote Stephen Jen explaining that “the Asian dollars are in fact more important than the petro ones - he estimates by a factor of ten to one.” I won’t argue this (of course not) but why is this important? I mean, it is a very interesting and important subject but from the point of view of the eurozone, Britain or the OPEC it’s something they have to accept as a fact: it can neither be influenced nor will it affect the considerations on whether to pursuit oil pricing or oil billing in euros.

Which brings me to European government strategy. “It is I suspect a widely held belief here in Europe that a significant part of contemporary American prosperity is based on the fact that the rest of the world is prepared to subsidise US consumption by holding dollar denominated assets. This, like most theories, is partly true.”

The arguments you use to exemplify the superior “performance of many of the leading US corporations” surprise me. As far as I know Amazon made no profits at all during long long years. Google and Yahoo may be very famous and politically interesting (I think of China’s regime attempting to influence the search-results of the engines) but seem to me economically of little significance. Google still has less than 1000 employees. If I was a shareholder I think I would prefer Nokia above Amazon (and what about Linux?).

Firstly about OPEC. What I was trying to say was that the quantities of petro-money involved in externally deposited funds are not as important as is often assumed. The Asian money in the US seems to be much more important, as does the European funding going into the US economy. Without this, as Stephen Roach continually points out, the US deficit would be unsustainable. But if all these Europeans, Japanese, Chinese etc are investing in the US it must be for some reason. Certainly it is not for the recent performance of the equity markets, so why is it?

There is no easy answer to this but I tried to suggest that one of the factors involved was the expectation of better general relative performance of the US economy (an expectation which seems to me to be reasonably well grounded) and in particular I wanted to make the point that this expectation is based on the way in which US labour markets have adapted to the new economic reality, and the way in which the US enterprise has been able to obtain productivity benefits from the ICT revolution which, to date, its European equivalent seems to have been unable to equal.

My mention of Google, (Blogger?), Amazon, Yahoo etc is meant as an illustration of this. The EU seems to be based on the idea that big is beautiful. This I don’t accept. I prefer the recently floated notion of 'small components loosely joined'. The European strategy seems to be based on the prowess of large ‘National Champions’, all too often former monopolies, and thus seems to have been unable to generate the kind of youthful vigour and initiative which for me are represented by the above mentioned names. You talk of Nokia, but this seems is a good case in point. Nokia seems to have become so locked-in to the GSM-UTMS transition that it has all but missed-out on the booming WCDMA market in the third world. And why is it so focused on the GMS-UMTS transition? Because some years ago the European Commission thought in its wisdom that if it could only adopt uniform standards from above, then it could steer the technology where it wanted. The whole approach seems to miss the user driven component in technology. And this is the reason I pick these companies, since the problem is about a whole attitude towards and relation with technology, and part of the European problem is reflected in your response. Put another way Deutsche Telecom, Phillips, Nokia, Vivendi etc represent very much the past (as do Disney, Coca Cola, McDonalds, Levi Strauss, and, who knows, AOL-Time Warner), and it's to the future we should be looking.

So I think that it is by addressing this problem, the problem of risk taking and corporate culture that Europe needs to change, not by trying to get, on the free and easy, a piece of the dollar 'action'. If Europe could make that change then in fact the euro would naturally follow a rising trajectory, and more entities would be holding euros in anticipation of its rising value. I also think Europe needs to be seen to react differently to its demography problem. The EU needs to face up to the fact that is a union of ageing societies. This reality needs to be recognised via a different approach to the question of national identity, and to the question of who is welcome in Europe. In this context the whole issue of Turkish membership has been badly mishandled in my view. Europe needs to cease being an agglomeration of distinct nationalities (often at rhetorical war with each other) and reach out to change it’s geographic and ethnic identity. As a metaphor for the radical switch that is needed I have floated the idea of India becoming a candidate country. This is only a metaphor, to try and make people think what the problem would be, and thus perhaps reflect on what prejudices they might have.

Finally on OPEC. I think that if the Europeans really want to be seen as favouring a different world to the one which appears to be being promoted by the present US administration, then it should reflect long and hard on the idea of enjoying favoured relations with OPEC. We should, for starters, reflect on just why it is that these funds are sitting around in this way in European and US bank accounts in the first place. It is hard not to come to the conclusion that no worse fate can become a nation than to discover oil. It seems more of a curse than a boon. When we look at Russia, Nigeria, Venezuela etc this view can only be confirmed. This money shouldn’t be languishing in overseas bank accounts, but should be being invested in profitable projects which can promote balanced economic development in the countries concerned. Remember the day will come when we’re all off oil (at least for energy purposes).

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