Floor it

Ralph Murphy

(7/12/2015) The possibility of a Greek exit from a Eurozone of 19 nations has been labeled a Grexit and could be followed by other nations as debts come due and they don't have a repayment plan. The primary funding source is the European Central Bank (ECB) and tied to bond issues. The Greek action has become more likely following a July, 2015 national referendum in which voters rejected austerity plans demanded by their creditors. Also in question is the viability of the Eurozone itself as advanced economic, creditor nations evaluate ties to emerging nations amid theft and poor investment.

Greece owes creditors about $300 billion in a design which has simply failed- mostly to the Frankfurt-based ECB, but also the member-funded International Monetary Fund (IMF). Greece is Europe's most indebted nation at 175.1% debt to income, and has no new income sources to supplement its traditionally strong tourism and shipping. They have been in recession since leftist Prime Minister Alexis Tsipras's Syriza party swept into power in January and they continue to lobby Frankfurt for more euros.

Backed by Germany's Bundesbank Berlin has had enough it appears as no new funding has been offered or will be forthcoming given the referendum and Greek noncompliance with terms. Greece has now again turned to the IMF for funding, but has refused repayment of a $1.8 billion loan in July and threatened to do likewise to another installment due later this month. The matter is being sorted out, but most of the money Greece owes is associated with long-term debt implying installments the Germans now appear unwilling to accept as unproductive and costly.

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The European Union was created with the 1993 Maastricht, Netherlands Treaty binding its current 28 members to political and economic integration. It evolved from a 6-nation,1958 Treaty of Rome and the subsequent European Economic Community. The Eurozone of 19 nations combined currencies into a single euro that began circulating in January 2002. Up until that time the Eurozone was considered likely to include most all EU members except Britain and Denmark who were among the 9 states who chose to retain their own currencies.

The ECB was developed to implement compliance for funding and administrative objectives of the EU- here the effective "Central Bank" of the euro. It was an offshoot to the formal prescription for EU members that each would provide democracy and human rights respect; retain a capitalist market economy; and strive to meet Eurozone requirements. The effort included a political role for its Brussels-based, European Commission headquarters. Its economic resolve came mainly from the Frankfurt funding. Stable economies in growth and inflation were also sought.

The IMF appears an adjunct player to surface lending, but a deeper study reveals that the EU has a very close, institutional-ideological base . It was created just prior to the end of World War II in Bretton Woods, New Hampshire with a primary purpose to "insure the stability of the international monetary system. A system of exchange rates and international payments that enables countries and their citizens to interact with one another."

The postwar world was relatively primitive beyond pockets of wealth- especially in America. The IMF's key purpose was exchange-rate stability and did that at the global level, but suppressed market forces and led to "competitive exchange depreciation." It did so by pegging exchange values at an artificial rate or "de jure" level that discounted the fluctuations in economic activities both internal to respective nations and in their international interactions- the "de facto" rate. The de jure and de facto peg levels were almost never met and the system was and is maintained by "surveillance" of its members.

In the computer age it is fairly simple to determine currency value differences within a nation as a result of resource management as reflected by Gross Domestic Product (GDP) income- or monetary supply unique to the country. Money is intrinsically almost void of value to conventional currency, but does serve as an approved store of value and medium of exchange.

Monetary policy can be politically haphazard, but if it matches actual increases or declines of desired productivity, is very predictable to domestic dealings. The money value "floats" to reflect supply and demand and value. These can remain much the same internally and the system works with or without artificial barriers. They may be based on political factors such as defense interests or economic measures in maintaining market share. Government funding is routinely needed but the consumers and producers seldom match the production pattern without some form of intervention. An internal currency "float" or government monetary issue based on supply and demand doesn't extend to cross-border currencies due to IMF resolve, and it's really time it did.

The money supply can also be quantified, and its value compared to other nations’ interactive variables allowing for their unique production. Post World War II planners couldn't anticipate or correlate economic activities, but they must now do so given today’s growth and diversity. They still cling to the old system of fixed currency exchange rates, and debt and political unrest has followed. The fixed exchange rate system doesn't allow for variance in money values in differing economic cycles. Policy makers now clinging to the IMF fixed rates discount the dynamic growth potential in a currency system allowing for the real competition that routinely exists in internal markets. The arbitrary fixed rates can make an otherwise affordable item costly and conversely costly ones cheap. They also now appear to wonder "what's gone wrong" in a system substituting payment in loans to offset the exchange expense for productivity in a design which has simply failed.

The IMF currently employs a quota system of loan payment that involves almost all members based on income levels. The United States provides about 17.6% of the budget, Germany 6.12%, France 4.51% and England 4.51%. Oddly enough, debtors such as Greece and Ukraine pay into the fund but also receive benefits.

The money involved is huge and getting bigger without a cap as panicked policy-makers opt for that international lever rather than fix the exchange rate system. Quota provisions allowed $327 billion (280 billion SDR's IMF currency) to this year, but funding since 2012 includes bilateral deals in a New Arrangement to Borrow (NAB) with up to $370 billion and committed resources at $885 billion.

That's the IMF, but EU policies are ironically quite similar especially as relates to the Eurozone. A Stability and Growth Pact (SGP) binds all members to an Economic and Monetary Union (EMU) that dictates fiscal oversight, surveillance, and sanction punishment if national debt goals at 60% of income and deficit at 3% of GDP are not met. The annual deficit is problematic, but the national debt figure is flouted even by key players such as Germany that owed 79.9% in 2013; France at 89.9%; and England at 90% in 2012. EU borrowers relevant to ECB and IMF concerns include Ireland at 118% of GDP debt, Spain at 85.3%, Italy at 126.1% and Greece at 175.1%. The EU debt to earnings itself was at 87.4% in 2013 so enforcement of the 60% cap is very unlikely. The euro issue of that debt is mostly ECB funds, some private money and IMF allowances and the ECB issue is almost all German-backed for future payments.

France had a role in the EU’s formation, but it is now largely a German effort to rule and provide European stability. The Germans would be bound to most of that debt in the ECB, but it was euro issue and they're not repaying. In fact there is movement toward the mark again there, as with Greece- and the drachma, France- the franc, and others who see the world nations as unique as trade partners, but not bound legally by a shared currency.

The British plan a referendum either in 2016 or 2017 on continued membership in the euro. Greece is out of the ECB fund link, but the IMF draws in world resources and might keep payments briefly, but the backers are all in enormous debt and the system continues largely on paper as no one can fund that level of billing.

The Eurozone is a debt alliance, apparently based on EU and IMF desires for stability in non-inflationary monetary policies between members. The IMF may continue to function if its de jure policy of exchange rate caps are lifted and they float to market-supplied de facto, economic activity at home and abroad. The lending role then won't be needed as the stability it artificially creates would be resolved by the respective markets. The system worked in a primitive economic structure- it's a retardant in our modern day, high tech world and must be scrapped.

Ralph Murphy is a former member of the CIA Headquarters Staff in Langley, VA.