MONEY MAKES THE WORLD GO ROUND
FOR the second time in a month, to my surprise, I find myself agreeing with President Putin. Speaking at the International Economic Forum recently, he warned: We don’t need trade wars today . . . we need a comprehensive trade peace.”
Cuddly old Vlad was really warning us that there’s a financial firestorm brewing. Looking at what is going on with the euro and the Turkish lira, it’s hard to disagree.
The euro is really our old friend the Deutschmark, cunningly devalued and disguised to pay for German reunification, and now Europe’s chokehold currency of no choice. For example, any independent Scotland joining the EU would nowadays be forced to accept the euro. Difficult for the Scots; not for nothing did Thomas Carlyle call economics “the dismal science”.
Dismal science or not, money makes the world go round — and always has done. Even St Paul admitted: “The love of money is the root of all evil.” This titanic battle for economic power rages around us every day, as China and America tussle behind the scenes over who owes how many dollars to whom and what they are worth, while a worried Commission in Brussels watches nervously as its great dream of a superstate called “Europe” begins to disintegrate.
Because the UK’s Brexit is the least of the EU’s problems. With Poland refusing to toe the Merkel party line, the Balkan states disobeying Juncker’s diktats on immigration, and now a major trade war looming with America, Brussels has its hands full. Money is at the heart of it all. The unfolding Italian political train crash that is the new populist, anti-establishment Eurosceptic government is Brussels’ worst nightmare. It threatens their euro. Austrian chancellor Kurz gives the game away, bleating: “We saw in Greece how dangerous it is if a country has a bigger and bigger debt and I hope that we will not have a second Greece in our neighbouring country, Italy.”
The reason? Money and debt. Frightened hard currency has been haemorrhaging out of cashstrapped Italy for months, driving it even further into the red, amid fears of a Greek-style euro debt crisis which would bring the country to its knees. The new Italian government is even threatening to quit the euro and set up a parallel currency. This is serious, because Italy is the eurozone’s third largest economy, nearly 10 times the size of Greece’s.
The former chief economist of the IMF believes the eurozone is heading for a “horrific crisis”, denouncing Italy’s populist new government’s plans as “likely to violate all EU and domestic fiscal rules and put debt on an unsustainable trajectory”. What he means is that Rome is inviting an economic and political war, because the big French and German banks risk losing billions if Italy says, “no more pay-offs”.
Brussels now has the beginnings of a serious rebellion on its hands. However, once again Italian voters have been overruled by EU technocrats, pressuring President Mattarella to ignore the electorate, just as the Berlusconi government was toppled in 2011 by Brussels and the European Central Bank, in what was effectively a “soft coup”.
This is dangerous territory. The Italian president’s refusal to accept the Lega-Grillini finance minister because he “could provoke Italy’s exit from the euro” is dynamite. The political message to Italian voters is clear: whoever you vote for, the eurozone rules. A Lega spokesman explained: “You have to swear allegiance to the god of the euro in order to be allowed to have a political life in Italy. It’s worse than a religion.”
Brussels’ Juncker openly threatens: “There can be no democratic choice against the European treaties. One cannot exit the euro without leaving the EU.” And Günther Oettinger, European Budget Commissioner, actually said: “This will teach the Italians to vote for the right thing.”
Because the ECB and Brussels will fight to the last drop of Italian money to stop anyone escaping from their eurozone straitjacket. The French finance minister warns: “If the new government takes the risk of not respecting its commitments [translated: Italy doesn’t pay its huge debts to our big French and German banks] the financial stability of the eurozone will be threatened. Everyone must understand that Italy’s future is in Europe and nowhere else . . . there are rules that must be respected.”
This push to smother Italy’s Eurosceptic rebellion, as they muzzled Syriza in Greece, comes from a worried Berlin, Brussels and the EU power structure. But this time they may have blundered into a trap, because the EU’s economic problems grow worse every day. Now debt-ridden Spain admits it is in serious trouble. And Spain owes Eurobanks zillions, too. The bottom line for the EU is that if the Italians and Spanish welch on their euro debts, then the euro is finished — with huge international bankruptcies on the cards.
“‘So what?” says the man in the Girne café. “How do big economic problems affect me, my family and my bank account? Who cares?”
The answer to the puzzled denizens of Turkish North Cyprus is: “Look at your money.” Something very odd has happened to their Turkish lira. One year ago, a pound sterling bought you 4.30TL; 10 years ago, on May 31, 2008, a quid bought just 2.12 lira. And today? Going to press, a pound buys you around six lira. That’s what international currency fluctuations do to the expat, watching his pension. That’s how small Turkish Cypriot businesses, being paid in lira while paying for their rents in sterling, go bust. The reason? Money: because the Turkish lira is now in deep international doo-doo.
For years Ankara’s AKP government has funded its massive vote-luring economic programme with money borrowed from overseas investors, attracted by Turkey’s generous interest rates. No less than 70 per cent of Turkey’s deficit is covered by short-term foreign loans.
The problem is paying off those loans. Interest payments were biting deeper and deeper into Ankara’s Central Bank’s precious reserves of hard currency, US dollars or euros. Loans began to dry up, so the Central Bank increased interest rates to tempt the punters and keep the allimportant foreign dosh flowing. The problem is that at 13.5 per cent the interest payments were expensive — but, at 16.5 per cent, they could become ruinous.
At which point Turkey’s wouldbe president stepped in, boasting that he personally intends to run the economy when he wins the election on June 24 to become allpowerful leader. On his orders, interest rates will be slashed to 10 per cent to save Turkey’s money. Result? Instant panic and predictable flight by spooked, nervous lira investors. Consequence? A market panic with foreigners desperate to unload their lira while they can. “Cheap? Your real, genuine Turkish lira. A real bargain, guv . . . Gotta sell.”
Because that’s what markets do. That’s how economics works: supply and demand. No demand for lira? Dirt cheap. The result is that Turkey will either have to devalue, introduce capital controls or accept that, whatever their leader thinks, foreigners will decide just what the Turkish lira is truly worth: and foreign investors are not impressed.
As an anonymous fund manager at a major asset management firm complained: “Erdoğan is fighting the extremists, he is fighting after the failed coup — now he is fighting the financial markets, and that is dangerous . . . You can fight your domestic foes all you want, but when you are trying to take on the global financial market, that is a battle you can’t really win.”
And the EU? Watch this space. Of one thing we can be sure: the Commission, Berlin, Paris and Frankfurt will gang up in a dark alley, ready to bludgeon, beat, bribe, browbeat and bully Italy to keep their precious euro together at all costs. Once again, the financial gloves are off. It’s going to get ugly. Just ask the Greeks.
Money really does make the world go round.