AN IMPERATIVE FOR A NEW GLOBAL FINANCIAL & ECONOMIC ARCHITECTURE

 At the inception of the Euro, Milton Friedman said: “the Euro real Achilles heel will prove to be political; that a system under which the political and currency boundaries do not match is bound to prove unstable. In any event, I do not believe the euro will be imitated until it has a chance to demonstrate its viability.”

 However prophetic this might sound today, the real insight from this gloomy prediction begs our belief with the rapidity in which the Eurocurrency is falling apart. The increasing globalisation of the world’s economies occurred without the solid foundation to support it. The structural shortcoming is tribute to disparate interpretation of what globalisation means in the first to different policy-makers.

 The amazing absence of a proper global economic and financial architecture is being clouded by the fact that many reputable individuals, including economists and politicians, tended to assimilate the existing Bretton Woods Agreement setting the multilateral development and aid agencies such as the World Bank and the International Monetary Fund and the UN System as a substitute to these proper architectures. There are not, both in substance and in remit.

 We proposed a new set of architectures encompassing new clusters of global economic and finance remits that relying on clearly identified pillars:

• Pillar 1: A creation of a new Consensual Economics Fundamentals that would replace traditional capitalism which has shown its limits both in the redistributive stance of its deployment and in its real capability in creating value, where the notion of value is defined based on scientific precision.

• Pillar 2: A creation of Risk Economics Fundamentals as a science in its own right which, would provide quantified risk measures encompassing the conceptual and the compartmental risk clusters with scientific precision that would ultimately remove subjective and value judgements as enacted by this ridicule culture of Rating Agencies being paid by those you can afford to be “rated”.

• Pillar 3: A creation of a Social and Green Economics Fundamentals that would provide benchmarking exercise for jugulating the effects and the costs associated to the Global Growth Theory and put a price on human interactivity with our usage of the scarce resources put to our disposal by the nature.

Under these three pillars, clear and concise clusters of intervention can converge to deals with the markets for goods and services, the markets for factors of production, government’s actions and policy making on markets, long-term fundamentals, macroeconomics fluctuations and policies and the global economy.

EXIT SCENARIOS FROM THE EUROPEAN MONETARY UNION

We provide four (4) scenarios for an EMU exit with an optimal calibration for each. In doing so, we make use of the innovative methodology embedded within our proprietary Lyscale Riskgrade Megasystem Engines (LRMEs) which are:

                Scenario 1: Greece Exits the EMU

                Scenario 2: Greece, Ireland & Portugal Exit the EMU

                Scenario 3: Greece, Ireland, Portugal & Spain Exit the EMU

                Scenario 4: Italy Exits the EMU

SCENARIO 1: GREECE EXITS THE EMU

Under the Global Monetary System setting we designed, Greece falls into the EUROPO basket of global currencies, in which the Euro currency is apportioned accordingly to represent its true intrinsic value relative to the GLOBE basket.

From our calibration engines, the Greece’s Drachma reinstatement would mildly impact on the value of the Euro while considerably altering the original value of its own. The risk incidence factor identified under calibration assumptions oscillates between 0.791 and 0.888 out of any unitary spread of risk ambivalence ratio.

In real terms, the Drachma will drop in value against the Euro between the intervals of 37% to 53% over a 5-year period while pulling the Euro down against the US Dollar by a mere 7.71% over the same period.

This scenario highlights new issues that may arise immediately in such a situation and which are:

• The exploitation of excessive market inflation expectations
• The positive credibility feedback
• The opportunity to save a risk premium at the Eurozone level (including in the UK)
• Making a better use of the appropriate nature of the Greek liabilities and by ricochet sanitizing the EMU balance sheet and
• Alleviating the stance of risk diversification on a wider European context

These new issues might, in some case, be opportunities to be seized at the European level. However, the delicate nature of mastering these volatile aspects of opportunistic outlays might not be well-handled by the clumsy bureaucracy both in Brussels and Frankfurt.

SCENARIO 2: GREECE, IRELAND & PROTUGAL EXIT THE EMU

Under the Global Monetary System setting we designed, Greece, Ireland and Portugal fall into the EUROPO basket of global currencies, in which the Euro currency is apportioned accordingly to represent its true intrinsic value relative to the GLOBE basket.

From our calibration engines, the Greece’s Drachma reinstatement would mildly impact on the value of the Euro while considerably altering the original value of its own. The risk incidence factor identified under calibration assumptions oscillates between 0.791 and 0.888 out of any unitary spread of risk ambivalence ratio.

For Ireland, the risk incidence factor identified under calibration assumptions oscillates between 0.457 and 0.611 out of any unitary spread of risk ambivalence ratio and for Portugal we have a risk incidence factor oscillates between 0.534 and 0.701.

The combination of these occurrences if engineering simultaneously would trigger the depreciation of all three national currencies respectively by 65% for Greece; 34% for Ireland and 57% for Portugal, which would exacerbate the Euro by wiping out 29.34% of its current face value. The immediate impact of the euro currency would then be inevitable devaluation by at least 21% of its permanent value against the US Dollar.

SCENARIO 3: GREECE, IRELAND, PORTUGAL & SPAIN EXIT THE EMU

From our calibration engines, the Greece’s Drachma reinstatement would mildly impact on the value of the Euro while considerably altering the original value of its own. The risk incidence factor identified under calibration assumptions oscillates between 0.791 and 0.888 out of any unitary spread of risk ambivalence ratio.

For Ireland, the risk incidence factor identified under calibration assumptions oscillates between 0.457 and 0.611 out of any unitary spread of risk ambivalence ratio and for Portugal we have a risk incidence factor oscillates between 0.534 and 0.701. The risk incidence factor exhibited for Spain oscillates between 0.453 and 0.593 out of any unitary spread of risk ambivalence ratio.

The combination of these occurrences if engineering simultaneously would trigger the depreciation of all four national currencies respectively by 65% for Greece; 34% for Ireland; 57% for Portugal and 27% for Spain, which would exacerbate the Euro by wiping out 38.82% of its current face value. The immediate impact of the euro currency would be inevitable devaluation by at least 33% of its permanent value against the US Dollar.

As this scenario suggests, the viability of the Euro as a currency at this stage would be seriously questionable.

SCENARIO 4: ITALY EXITS THE EMU

 From our calibration engines, the Italian Lira reinstatement would greatly impact on the value of the Euro while considerably reinforcing the original value of its own. The risk incidence factor identified under calibration assumptions oscillates between 0.211 and 0.277 out of any unitary spread of risk ambivalence ratio. The immediate impact on the Euro currency would be an overall scrapping of the currency altogether as its permanent intrinsic value would simply deplete to a point of non-return, which according to our calibration assumptions stand at 33% of its face value while appreciating the value of Italian Lira by 12%.

The size of the Italian economy, standing as the third largest Eurozone economy, makes it virtually impossible to sustain the viability of the currency even in the short-term not least in the medium or long-run.

Conventional wisdom dictates that countries with a unified currency system trade a great deal more with one another and are able to exploit the gains from trade and therefore have a higher standard of living.  This is a case in point with the Eurozone for Italy proximity with France and Germany makes it viable for the zone to combine monetary forces in support of less fortunate economies such Greece, Portugal and Ireland.

Mamadou Ly

BSc Hons Economics, Accounting & Finance, EMBS (Oxford), ACCA P/Q, GIFEM

Chief Executive Officer, Lyscale Riskgrade

Chairman & Co-founder, Lybrosis Capital Group

Managing Partner, The Black Swan Partnership

Chief Originator of the Global Monetary Hedge Portfolio Fund