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Decoupling the Euro from Russia

It is axiomatic within macroeconomics that the value of a currency represents the value of the assets that the currency represents in the sense of the underlying economy of the currency in question. A currency may be made weaker or stronger compared to other currencies by way of fiscal policy - deciding how much money to print - but the value of the currency as a whole represents a set of assets or institutions or at least something that at independent third party could consider to be of value. A currency, after all, is a bill of exchange; it is a piece of paper in lieu of barter, allowing its holder to exchange one item of value for another. If the currency in question has no underlying asset of value, then its value is liable to be nothing more than the result of speculators. That is why foreign exchange analysts have recurrent anxieties about so-called crypto-currencies, whose underlying assets appear to be something not of value at all. In the case of bitcoins, for example, the underlying asset appears to be ever larger prime numbers of ever increasing rarity, something which ought to have no objective value whatsoever. Why then does bitcoin have a value? The answer is because that people are speculating that other people will assume that it will have a higher value in the future than it does now; and they are buying it off the back of that. Currencies of this kind turn out to be Ponzi schemes when the speculators all shy off and nothing is left with which to buy your currency as a real asset.

In the case of a supra-national currency, the Euro being the best and by far the most successful example (there have been others in the past, including the Pound Sterling during British Imperial times and a French imperial hangover, the Central African Franc), what is the asset that the currency represents? Each country’s economy is of a different size and model, albeit that they are inevitably converging. One thing that they did represent at one point was Russian hydrocarbons: in other words the underlying asset in the Euro was Russian oil and gas, because the Eurozone consumed so much of it. This was rendering the Euro a reserve currency for Russian hydrocarbons. Whereas oil and gas from Russia and her neighbours might fluctuate in price against the US dollar, against the Euro it would remain approximately stable. In other words Russia was underwriting its own commodity assets using the Eurozone: something that the United States was determined to decouple. Whatever the underlying asset is behind the Euro, it should not be Russian oil.

There has been a lot of speculation about the September 2022 destruction of Nordstream pipeline, but one of the more intriguing conspiracy theories is that the West was responsible for destroying the principal gas pipeline between Germany and Russia precisely to decouple Russia from the Euro and to prevent it from becoming a reserve currency for Russian hydrocarbons. Even if the conspiracy theories that the West was responsible for blowing up its own pipeline are of dubious plausibility (and here is a summary of the tenuous evidence for them), the underlying economic logic is rational. In geopolitical terms, unhooking the Eurozone from Russia gas assets was essential to rebalance the Euro and ensure that its value is no longer tied to Russian hydrocarbon products that it was being used in large proportion to purchase.

Instead the proper value of the Euro is premised upon the structural integrity of the institutions within the Eurozone that represent a sort of political and economic stability of an entire region of Europe, and this is what keeps the Euro at a stable and sustainable value. This stands in stark contradistinction for example to the Russian Ruble, a currency whose global value is not premised upon institutional quality at all (there is none) or political integrity (there is none of that either); but instead more or less exclusively upon the capacity of the Russian state to pump its hydrocarbon assets - in other words, the value of its primary industry. Any country pumping oil and gas in such large quantities and the receipts for which are ultimately received in its local currency is going tom have a tolerably stable currency of reasonably high value, even if the state has an atrocious political system and even if it is an international pariah with sanctions imposed by all sorts of foreign countries: as long as the country maintains a practical capacity to pump and to export which Russia does. That is why the Ruble remains stable amidst war.

It seems most unlikely that the United Kingdom blew up its own German ally’s principal infrastructure asset for the delivery of Russian gas. Nevertheless, and however this event took place, it was undoubtedly a blessing in disguise is that it removed Euro valuation dependence from Russian gas and also German and broader European economic dependence upon Russian hydrocarbons. This has permitted the Eurozone, and Europe as a whole, to form a more robust anti-Russia strategy in the context of the war in Ukraine. Europe has been forced to, and has, found other hydrocarbon supplies and therefore Russian economic hostage-taking has been minimised. This fortifies the West for a long-term struggle against Russian neo-imperial expansionism.


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