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Mon, Jun 06 2010 |
“What we are looking at is the possible reintroduction of the Deutschmark (DEM) or a transformation in the euro that would make it more comparable to a ‘Greater Deutschmark,’” Derrick said while speaking to a group of investors at the Beirut International Exhibition and Leisure Center on Friday.
“The only thing we can take credibly is that as Germany is the economic powerhouse of Europe, a German withdrawal from the euro would effectively end the single currency,” he said.
When asked whether Germany would in fact leave the currency, Derrick appeared certain that although the idea is popular in Germany, the country would likely remain with the euro. “Politically, a German exit from the euro is very popular and Germany is coming toward an election date soon,” said Derrick.
“But the reintroduction of a strong DEM would have a negative effect on the German export market – and this is another consideration Germany has to take,” he added.
“The main reason for not breaking up the euro is the logistics,” said Derrick. “How would you disentangle individual countries from the web of an intercommunicated fiscal system? It would lead to the destabilization of capital funds and be economically destructive.”
Derrick also alluded to the recent popularity of the Euro as a reserve currency (as opposed to the US dollar), in particular noting the recent change in China’s preference for the Euro.
“I believe that 31 percent of China’s foreign reserves is held in euros, that is to speak of around $2.45 trillion,” he said.
“So when a large quantity of money effectively disappeared from its reserves recently, China became extremely concerned,” he added.
As a result, according to Derrick, the biggest effect to be felt from the current Eurozone crisis will not be felt in Europe therefore, but in China – as a result of the reduction in value of the euro as a reserve currency.
“What we will see in all likelihood, as the largest outcome of this situation in Europe, is a change in China’s financial policy,” he said.
“China has been affected by the sudden destabilization of its economy as a result of a reliance on foreign currency reserves,” he said. “And as such, the new financial super-power will be looking elsewhere for a greater promise on economic security.”
For his part, Saad Azhari, chairman and general manager of BLOM bank, noted that Lebanon in the past two years had remained crisis-free and had been blessed with a period of solid growth, financial excellence, and monetary and exchange rate stability.
He added that the conduct of monetary policy was equally successful, resulting in consistent improvements on all fronts. “Capital and financial flows averaged over $20 billion annually, while foreign reserves increased by close to $18 billion to $27.4 billion, dollarization fell by 15 to 63 percent and yields on 2-year TBs fell by 2.8 percent to 5.4 percent.”
While referring to fiscal policy, he noted that the country was fortunate enough to score some impressive improvements despite the absence of reforms. “These improvements were largely a product of the cyclical upswing in the economy and were reflected between 2006-2009 by a reduction in the debt to GDP ratio from 181 percent to 151 percent and a reduction in the deficit ration from 13.6 percent to 8.8 percent, in addition to an increase in the primary surplus ratio from 0.54 percent to 3.2 percent,” he said.
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