Thousands of IBMers will end the summer out of a job as a direct consequence of the lunacy of the European Exchange Rate Mechanism. The uncharitable would say that they are being sacrificed on the altar erected to the pride and self-aggrandisement of two foolish old men, Francois Mitterrand and Helmut Kohl, those of a more kindly disposition would put the grand continental tragedy down to the collective madness that periodically grips nations and early this century led to World War One. Watching the ever more desperate – and damaging efforts to save the Exchange Rate Mechanism is like watching the present England cricket team trying to save a Test Match against Australia: even when mathematical hope remained, one knew in one’s heart that the series and the Ashes were lost. Just as do all the continental economies bar Germany, IBM Corp is haemhorraging mortally for the want of much, much lower interest rates. And the damage is already so severe, as the US economy, which for three years has had the low, low rates for which Europe is crying out, demonstrates: even with low interest rates, the US recovery is patchy, and the same is likely to be true in France and the other major continental economies. The damage on IBM among big companies is particularly severe because Europe represents up to 40% of the company’s business, and the company’s own plight is so severe that it cannot afford to keep any underemployed people on the payroll against the day when recovery finally arrives. Moreover business lost now by IBM in Europe will never be recovered: conditions in the unique case of the computer market, and the perception of users of the most appropriate future strategy, will have changed so much when the dawn of recovery begins to appear, that IBM has to resign itself to the fact that users won’t still be in the market for most of what it has to offer today.
Artless prestidigitation
The absurdity of the Exchange Rate Mechanism is that although the French franc is being crucified by the strength of the German mark, the currency that is most overvalued on the fundamentals of the German economy is the mark, and it is highly likely that once the system finally collapses and the franc is allowed to float free, backed by much lower interest rates, far from trading at way below its present parity against the mark, it is likely to float upwards to reflect the prospects of the French economy and French inflation rates versus those of Germany. The tragedy for the ideologues that still stubbornly stick to their belief in fixed exchange rates in face of all the evidence is that there is no way of reaching that happy outcome without the franc falling against the mark first: clearly in a sane world, France would cut interest rates by three percentage points this week and let the exchange rate go hang for a few months, doing all of Europe the greatest possible service in the process. But too much political capital is tied up in the present unsustainable position to enable that to happen painlessly. It is a sad fact of political life that only Japanese governments are able to make what they want to happen by saying it is so. In Japan, the government makes large amounts of money available for investing in the stock market, simultanously orders the institutions not to sell, a soggy market rises a couple of thousand points, and the government says the stock market is a lead indicator, the market is going up, therefore recovery is under way. Whether we really want our governments to indulge in such artless prestidigitation is another matter: real Japanese people thrown out of real jobs might have their doubts about the value of the trick, and markets have a nasty habit of turning round and savagely biting the hand that treats them dismissively. Up to the collapse of the Bretton Woods system in 1970, we had some 25 years of experience of fixed exchange rates: until the invention of the Exchange Rate Mechanism, we enjoyed floating exchange rates. Experience shows that both are very imperfect systems: the first brings regular crises, under the se
cond, parities periodically wildly over-shoot – remember the $2.40 pound of the early 1980s? – but it is in the power of intelligent central bankers to minimise overshoots, and on balance, pace all the businesspeople that long for the stability and certainty of fixed exchange rates (c’mon, it’s not that hard to find financial controllers capable of canny hedging and forecasting exchange rates forward), we have to say that of the two systems, a regime of freely floating exchange rates, for all its imperfections, is by far the less damaging. And there is a silent army of soon-to-be-unemployed IBMers that would sigh a fervent amen to that.
