Will sound Nordic countries switch back to their national currencies letting the others stew in their juice?

They were quite angry at us and they reacted “kindly” expressing their resentment. It was after the Turkish crisis of 2001 and before the global crisis of 2008. Working at the Central Bank of Turkey (CBT), I used to attend the semiannual meeting of the Bank of International Settlements, which is in a way the bank of central banks. Each one of these meetings was held with a focus on a Central and Eastern Europe countries, Turkey among them. Meetings were attended also by bureaucrats from the European Central Bank (ECB) and Brussels.

I remember that Serbia’s representative restarted joining meetings after a period of exclusion. In one of the meetings, the debate somehow changed direction and Serbia’s representative made a statement reading, “we are willing to switch from our national currency to Euros.” Both the ECB officials and bureaucrats from Brussels reacted instantly and explained at length why this was unacceptable. I witnessed similar reactions also in other platforms. 

Draghi buoyed markets

With ten-year Spanish government securities’ return reaching 7.69 percent this week, ECB President Draghi declared on Thursday that such developments weakened the influence of monetary policy on European economies. He reminded that among the ECB’s duties were to clear up the channels through which monetary policy influences the economy. Markets’ interpretation of this statement was that after a long time, ECB was ready to buy the securities of troubled countries. This naturally buoyed stocks markets in turn.

In fact, the ECB’s generous monetization to buy government securities does not solve Europe’s rooted problems. What is more, the Bank already carried out security purchases via monetizing. Still, additional purchases could help Europe save some more time. In the end, returns on securities will decrease to some extent and for some time. Perhaps, meanwhile a solution to protect the value of Euro can be found. This was the general frame of thinking.

Not so long ago, some countries could only dream about benefiting from the “advantages” of switching to and using Euro. And look where we have arrived today. One of the major matters of debate today is on how the Euro system will collapse: will countries in turmoil leave Euro or will sound Nordic countries switch back to their national currencies letting the others stew in their juice?

The answer is of course obscure. Who knows, maybe they come up with a magical formula to survive Euro. Yet, some other things are not that obscure: first, the Serbian representative I mentioned above, who made a gaffe out of inexperience as he missed previous meetings, must be laughing at himself for what he said back then. Second, the relief the latest statement by the ECB gave to the markets will not last long. Soon, we will most likely witness comments that returns on Spanish and perhaps Italian bonds are unsustainable and another downturn in markets.

This commentary was published in Radikal daily on 28.07.2012