Swiss Franc Soars, Euro Plummets—World Wonders if the European Union Is Doomed
The Swiss National Bank stared the world in the eyes and told a bald-faced lie. It might have been one of the most expensive lies in the history of global finance. But the moral of this story has nothing to do with morals. It has everything to do with the survival and future of Europe.
In a shock announcement on January 15, the Swiss National Bank (snb) said it was reversing policy and would no longer defend its currency peg to the euro. For three years, Switzerland emphasized that it was “prepared to purchase foreign exchange in unlimited quantities” in order to maintain the peg (emphasis added throughout). It was an economic imperative, its cornerstone policy, snb said. It was a national survival issue.
Then the lie was exposed. “If you decide to exit such a policy, you have to take the markets by surprise,” bank president Thomas Jordan eventually told a stunned audience.
Seconds later, market makers reacted with fury. Trillions worth of currency revalued. Within minutes, the Swiss franc shot up 41 percent against the euro—the sharpest move by a major currency in history. Switzerland’s main stock market plummeted by 9 percent on the news—the biggest fall in a quarter century. The next day it was down 6 percent more. Hundreds of billions in market value were eviscerated.
Then the carnage spread. Small brokerage firms like London-based Alpari, New Zealand-based Global Brokers and U.S.-based Boston Prime and lqd Markets began going bust. Bigger firms like New York-based fxcm scrambled for rescue loans. Pension funds took losses. Normally stoic mutual funds, priding themselves on their conservative nature, revealed billion-dollar losses to investors.
A 2008-style Wall Street banking crisis seemed possible. Investors wondered where the derivative losses would end. Who would be left holding the insurance bag?
It was a strong sign of the precarious nature of the global economy.
These kind of currency moves just aren’t supposed to happen. Established currencies typically move like giant cruise ships, a fraction of a percent at a time. The big currencies might move a few percentage points a month—but never 40 percent in less than 40 minutes. And especially not the Swiss franc with its Rock-of-Gibraltar reputation.
The world wondered: What was going on? What could have caused the Swiss to suddenly reverse policy without a word of warning? To risk setting off a mini-Lehman moment?
The official answer was that Swiss money printing, designed to keep the franc’s value low and in pace with the devaluing euro, was causing inflation to hurt the economy. Real-estate values were rising, and other distortions were hurting economic growth.
But something new did happen—something that market analysts failed to understand.
On January 14, the European Court of Justice (ecj) declared legal preeminence over Germany.
For the past decade, the German Constitutional Court has asserted that it ultimately decided all matters integral to its sovereignty. It was an opinion reasserted time and again—stating that various policy areas “must forever remain German,” or else the country must “refuse further participation in the European Union.” It was a position that the European courts never accepted but never challenged—until now.
According to the ecj, those days are over. It is time that Germany becomes fully European and submits to European rule. The Telegraph’s Ambrose Evans-Pritchard explains:
The European Court of Justice has declared legal supremacy over the sovereign state of Germany, and therefore of Britain, France, Denmark and Poland as well.
The ecj’s advocate general has not only brushed aside the careful findings of the German Constitutional Court on a matter of highest importance, he has gone so far as to claim that Germany is obliged to submit to the final decision. … The opinion is a vaulting assertion of EU primacy. If the [Federal Constitutional Court of Germany] accepts this, the implication is that Germany will no longer be a fully self-governing sovereign state. The advocate general knows he is risking a showdown but views this fight as unavoidable. “It seems to me an all but impossible task to preserve this union, as we know it today, if it is to be made subject to an absolute reservation, ill-defined and virtually at the discretion of each of the member states,” he said. In this he is right. “This union”—meaning the union to which EU integrationists aspire—is currently blocked by the German court, the last safeguard of our nation states against encroachment. This is why the battle is historic.
What will the German court do? The ecj’s “opinion is a direct affront to the German court. It asserts that the EU court has the final say in defining and creating the EU’s own powers, without any national check,” Gunnar Beck, a German legal theorist at the University of London, said. “This would be a fundamental transformation of the EU from a treaty organization, which depends on the democratic assent of the sovereign states, into a supranational entity” (ibid).
According to Evans-Pritchard, the ruling “enthrones the ecb over a monetary dictatorship answerable to nobody.”
But it is also possible that the ecj justices could get their heads handed to them. They have picked a fight with the most powerful court in Europe’s most powerful country. The German courts could refuse to submit and order German businesses to refuse cooperation with Brussels. The ecj may get sent running back into its stuffy chambers to mull over its unenforceable legal theory.
What will Germany do?
Just days after the dramatic ecj and Swiss actions—the European Central Bank made its own astonishing announcement. The bank plans to print €60 billion per month, up to €1.1 trillion total, to buy the debts of troubled nations. This supposedly would be done to stop Europe’s economies from falling into deflation.
This move, strongly opposed by the German Bundesbank, is an act of political defiance against Germany. When Germany gave up the deutsche mark and joined the eurozone, it did so on the condition that Germany would never be outvoted on any issue of critical importance.
Germany is strongly opposed to money-printing schemes. It remembers with bitterness the hyperinflationary Weimar Republic; wheelbarrows of worthless bills, trillion-mark postage stamps, and people burning stacks of money to heat their homes. And how that led to National Socialism. Germany also knows that forcing creditor nations to bail out debtors does nothing to solve underlying economic problems. What will prevent debtor nations from promptly going back into debt? It is a valid question, although an equally valid question would consider Germany’s role as an accomplice.
But the main fear of many Germans is that the ecb is stealthily working toward full European monetary union—a common debt market—where member nations are collectively responsible for each other’s debts.
But monetary union without political union is a disaster waiting to happen. It can’t work without a European strongman able to wield enough authority over member states to keep them in line.
The Bundesbank’s clash with the ecb (and its superstate vision) could hardly be clearer. Both of Germany’s executive board members (Jürgen Stark and Jörg Asmussen) resigned in protest against the bank’s policies (2011 and 2013 respectively). Germany’s member of the governing council and chief economist Axel Weber also resigned in protest in 2011. That is three in four years. Executive positions normally last eight years.
And the clash between Germany and the ecj/ecb could hardly come at a worse time. People are losing faith in the ability of central banks to restore prior prosperity. Economies are locked in recession, unemployment is high, youth unemployment is a powder keg, and the world’s super wealthy are stretching their lead. The global economic system is precarious and prone to revolution.
As a result, age-old economic truths are reasserting themselves. Truths like, he who has the gold, makes the rules. On January 19, the German Bundesbank announced that it had repatriated 85 tonnes of gold from New York and 35 tonnes from Paris. In 2013, Germany decided to take custody of 674 tonnes of gold stored in the United States and France. It followed a surprise announcement last year by the Netherlands indicating that the bank had secretly brought home 122 tonnes of its gold (approximately 20 percent of its reserves), which was stored at the Federal Reserve Bank in New York.
Bringing gold back from New York and London, the world’s two leading financial centers, is gaining momentum. Politicians from France, Belgium, Austria, Finland, Switzerland, Romania and Poland have all publicly discussed repatriating their gold reserves. Meanwhile, central bank gold sales of European nations have come to a screeching halt. Other central banks have become big buyers.
“There is a giant secret stirring under today’s market,” says 90-year-old market veteran Richard Russell. “China, India, Russia and almost every central bank is buying physical gold. I’m guessing that within another year, physical gold will be swept off the market.”
Europe is a mess and is in need of strong leadership. The battle between the German and European constitutional courts, the battle between the German and European central banks, the unprecedented market volatility, Europe’s persistent high employment, the euro debt crisis, and the rise of nationalistic parties across the Continent are conspiring to potentially turn 2015 into a momentous year.
Will Germany get in line with the European susperstructure and work from the inside to exert its influence? Or will Germany and its constitutional court revolt, break up of the union, and a form new smaller union of nations centered around Germany and built on German ideals?
The exact path forward may be murky, but the destination is clear. For more, read “Europe’s Iron-and-Clay Unity.”