Nobel prize winner dr. Jan Tinbergen wrote me: "I know nothing about money".
By: R.M. Brockhus, 6 December 1996Few people have spent time and thought on the consequences for the stock exchange and interest rates because of the European Monetary Union. And just because of the changes within the monetary and economic structure in Europe; as also in the Netherlands. This may seem a little odd, because everywhere discussions are heard about the EMU and the euro.
Through the media citizens are given just a glimpse on the complex issues. The standard example is, that one loses value of money through the various countries during a journey. This loss occurs by the successive changes of currencies at the borders during a holiday. But this aspect is hardly interesting enough to create a monetary union with the 'euro' as a coin. (I still think Ecu sounds better).
This analysis is about something else. Visitors of the SDN-site will have understood that the structure of the monetary system is the main issue in our publications. In this case also. Then, what happens when the banks have to work with euro's? Especially in a international field? Right you are, the time that an international (is European) payment is settled will be reduced drastically. And businessmen who do a lot of international business know that the time consumption here is one of the most irritating aspects of international trade.
The cost for the exchange of currencies at a daily basis will disappear. So one has in fact not to suffer any longer the losses of conversion doing international business. The bankers are not too happy with this, then for them this was really big business. The customers had and have no idea about the time that is needed for the completion of a financial transaction. Experiences with the collection of small amounts (about 50 euro's), go with extreme high cost. Sometimes 60 percent of the amount to collect is charged by the banks. The ultimate form of robbery.
The head of this article is meant for something else. What will be the consequences of the introduction of the euro for interest rates? By studying the papers of
you will discover that the actual flow of money in our economy, as a result of the realisation of the EMU, will change drasticly. And of course with enormous consequences for the development of interest rates, but also for the movement in price levels at the stock exchange, for the economic growth in Europe and for the competitiveness with Japan and the United States.
What is, in short, the prognosis for the level of interest rates? The large trading nations like Japan, the US and Europe will become more stable at this point, where the traditional very low level of interest rates, as in Japan, will become guide line for the possibilities of financing trade and industry. A business that is financed with Yen will have an advantage for competition; and consequently generate a larger power for expansion. The international way of financing trade and industry will become more easy and more consistent, because there are less fluctuating currencies in the world. They are not only larger in size, but also less vulnerable for speculation.
The hundreds of billions of business and financial assets that are absorbed at this moment in the European currency exchange mechanism (at least 15% of all monetary means) will become free and tax free available for the entrepreneurs after the unification of Europa. This disinvestment of assets from the monetary circulation will cause a decrease of lending for businesses (business assets become available for production and investment), but the monetary liquidity in Europe will increase sharply. The interest rates will decrease further because of a lack in demand for credit as monetary liquidity (M1) and for the financing of debtors. The danger of this last aspect is evident. Inflation can soar to 20 percent easily, because of the huge increase in primary liquidity. The sponge of time becomes squeezed and lets the liquidity it absorbed before go free. For the European Central Bank this phenomenon cannot be regulated properly because, except for France en the Netherlands, nowhere in Europa a system of lending restriction is executed to regulate the money supply; but mainly with a convulsive policy of interest rates and cutting down on expenses. The influence of the ECB on keeping inflation low will be very limited at first, if not absent at all.
The index of shares at the stock exchange will rise sharply in order to absorb excessive liquidity, next to a decline in interest rates by freed money out of the banking and currency carrousel. The freed purchasing power from the aforementioned process will seek and find its way to commodities, real estate and expenditure, and generate employment, wealth and inflation. In other words: the European stock exchange will see a boom as never before, rising employment as never before, and rising inflation as never before. The only two parties that will suffer from this development are the investors in state bonds and the poor and the homeless, who will not be able or be enabled to compensate their rising cost of living. Free market condition prevent such a socially highly desired compensation, because greed is the key factor in any free market system. The expansion of liquidity by the euro differs structurally from the one with a fusion between banks, because the citizen himself has for once some influence on the national flow of money; and this is opposite to the situation with a fusion between banks, where manipulation of the flow of money is kept out of reach of citizens.
For the European government this process will generate so much financial means, that even for social benefits and for infra-structural investments enough financial means will be available to do both. When people understand that the rising values have to be spent in a sufficient way within a reasonable short period, than the new capital will not hang like a millstone around the neck of future generations. Economists and politicians who argue that the national debt is a burden for our children, overlook the fact that our children are the heirs of that fortune, and their arguments are subsequently void. There are only two problems here. Which and how many children will inherit this wealth.
Taxation of this wealth is absolutely necessary in order to prevent morbid growth of capital like in some undeveloped countries. The economic dichotomy of our society is the main cause of poverty and unemployment. Understanding money as a very complex phenomenon is the main task for economists, bankers and politicians. The European unification can become a socially oriented economy in stead of a combat- or cut-throat economy like in the United States and elsewhere. The Rhineland model will gain in the long run the victory over the free market oriented model.
Conclusion:The European unification will stabilize the economic structure in the world highly. It will boost the index of shares and generate al lot of employment. The deficits of the (European) government will decrease by itself, and interest rates will decrease to a historic low level. Just like Aristotle, Keynes and my good old friend Dr. W.P. Roelofs advocates for so long. This unification can generate an economic boom, that won't find its match in history. The Golden Age was the result of a gigantic influx of precious metals (gold and silver) from America to Europa, which in fact resulted in a kind of inflationary financing of the economy.
Today and tomorrow the creation of (inflationary) purchasing power on the stock exchange will generate so much economic power, that an economic 'boom' is to be expected. For the European government it will be difficult to choose the right method of expenditure. In the Golden Age money was an asset itself in the form of non-perishable goods that could be saved (gold and silver). Today's money doesn't have those characteristics. If the European government does not bring the savings and newly created or revived purchasing power to final expenditure - with taxation or by borrowing - than the same disaster can happen as on Wall Street in 1929 on the stock-exchange, or with the Nikkei-index of Tokio in 1987: a predictable collapse of the stock market.(from 40.000 to 11.000 on August 24th 2004)
Investors will have a long term interest - just like in America - in the fiscalization of the gains and losses of their investment in shares. Making profits and losses on the stock market taxable and deductable, can stabilise the economy even more and generate financial means for the European government. So far I have heard nothing about this option yet. Maybe the article in De Volkskrant of December 5 about the gain of 90 billion guilders of value on assets of the large institutional investors can be a cause to reflect a bit more about the characteristics of money and capital. For this I recommend you to read my thesis MONEY, THE DNA OF THE ECONOMY in Dutch.