Parity hysterics: What it means and what it doesn’t, Part One

Image by Gerd Altmann from Pixabay

There’s been a flurry of articles, news stories and headlines lately over the developments in the FOREX market, specifically over the moves of the EUR/USD currency pair. As headwinds on all levels, economic, geopolitical and social, got a lot worse in recent months for the Eurozone, the news-breaking, headline-dominating “parity” event finally came about, with the euro even breaking below parity on July 13, and it seems to have captivated global mainstream attention – for all the wrong reasons.

The superficial story

Of course, this development makes the perfect base for a catchy news article, especially given the state of financial literacy of most news consumers in the West. For one thing, the euro hasn’t been worth as much as the dollar for 20 years, a fact which in and of itself is striking enough. Most europeans, having failed for decades to understand what their money actually is, how it was dreamt up in the first place and how it is still being created at will, have always tended to view their currency as “stronger”. And in some, rather insignificant, sense that has been true, as indeed one could buy more “stuff” with the same amount of euros than with dollars. Therefore, any European would understandably be alarmed by headlines claiming that this will no longer be the case.

It is important to acknowledge that not all of the coverage or all of the reactions were pure fear-mongering or click-bait fodder. Some mainstream financial news sources sought to explain the gravity of this event by outlining some of its potential implications and consequences. For example, some analyses explained the impact on imports and exports and what this extra burden might mean for the already heavily battered Eurozone economy. Same goes for the potential effect on tourism, on businesses with international exposure and overseas relationships, on the energy market and so on.

From this “economics 101” perspective, there’s really one take-away that is important for the average citizen to grasp and that most reports failed to highlight, or even mention. Larger and multinational companies that export outside the common currency area stand to benefit from the euro’s fall. Such companies can be found in the automotive industry, among chemical manufacturers and in the luxury goods sector. Conversely, import-orientated operations, like small, local businesses could see their costs explode even more than they already have.

And then, there are all the explanations for the euro nosedive. Some “experts” blame the Ukraine crisis for it and the fears that Russia would “cut off” gas supplies to Europe, while others point to the Fed’s more “aggressive” shift in monetary policy, in stark contrast with the ECB that still maintains negative rates while inflation is running amok. Eurozone officials in particular have been especially eager and/or desperate to find an explanation that absolves them, quite understandably.

The best candidate among them was arguably Francois Villeroy de Galhau, France’s central bank chief and ECB Governing Council member, who accounted for the parity by essentially saying “it’s not the euro that’s weak, it’s the dollar that’s strong”, demonstrating the degree of understanding of monetary dynamics (but also of basic logic principles) that central bankers at his level seem to share.

What parity really means

In brief, it means nothing. In practical terms, comparing two overinflated, unbacked and historically blatantly manipulated currencies is not unlike asking which of two inherently worthless things is more worthless than the other. Both currencies are supported by nothing but blind faith in governments and have been repeatedly used against their holders and users. This is the fundamental reality that most news reports and “in-depth” analyses have left out and which essentially makes this whole event a “non-story”.

There are, nevertheless, some important lessons that we can still extract from this development. For one thing, while it’s true that both currencies are worthless from a pragmatic, sound money point of view, it might indeed make sense to argue that one is “more worthless” than the other. Their “origin stories” are vastly divergent and the way the euro came to be is a true travesty in monetary history. While today neither is backed by any hard asset, at least the dollar used to be at one point. It can also be argued that the greenback had a relatively more “natural birth”. The level of artificiality that was involved in the euro’s birth on the other hand renders the phrase “funny money” uniquely appropriate to describe it.

The very fact that the euro even exists goes to show how little central planners have learned from the mistakes of their predecessors. “Willing” a new form of money into existence and then forcing people to abandon their own and to adopt it is a scheme that was always doomed to fail. Even more so when the newly invented and imposed currency removed all kinds of control from the nation states and handed the reigns to an unelected central authority that cannot begin to understand (or perhaps doesn’t even care about) the striking differences between the various economies that were brought willy-nilly under the same monetary “roof”.

————— END OF PART 1

In the upcoming second part, we’ll turn our attention to another, much more consequential shift that has been taking place in the background: reverse currency wars.

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Claudio Grass, Hünenberg See, Switzerland 2022