If you’re among the expatriates who live in Thailand with euros, you’re probably used to automatically divide the price in Baht by 50 baht to get the equivalent in euro. Easy, dividing by fifty (100 baht = € 2) was still fairly close to reality a few months ago with a euro between 47 and 48 baht, but now we must get used to divide by 40, and may be less ….

Suddenly your dinner 100 baht is spent in a few months to 2.5 euros (this is the price of an expresso in Paris, if it makes it feel better…), that is to say that your purchasing power Thailand (Actually that of the euro to be precise) declined by over 20% in six months. As if the Brazilian inflation had suddenly invaded the land of smiles. Many of you surely therefore closely monitor the plunge of the euro by asking the same question: how far and how long?

bigmac — The Economist has invented a decade ago, the Big Mac index, as the Big Mac is one of the few products available worldwide, and whose composition is strictly identical. The index shows that most Asian currencies are undervalued against the dollar while the euro is overvalued by 24% compared to the U.S. dollar.

Unfortunately, there is not much good news for the future of the Euro. The first observation we can do is that the euro has not fallen that much: actually it is still very far from its lowest against the dollar (close to 0.8 in 2001), and we must not forget that at the time of its launch a euro / dollar parity was considered a pretty realistic goal, which would mean a euro …. 32 baht. Ouch

There are several ways to get an idea of the relative value of one currency against another. The truth is that the Asian currencies, which include the Thai baht appear almost always undervalued against the dollar and the euro. This under valuation is the result of a policy deliberately oriented towards exports.

Currencies undervalued to export more easily
The country has been most successful in this way is China, which has now earned enough foreign exchange reserves : about $ 1.3 trillion, which are also often invested in government bonds ( mainly U.S. Treasuries). To remain competitive vis-à-vis China, most Asian countries have therefore agreed to some undervaluation of their currencies to stay in line with that of the Chinese Yuan.

dollar euro — The euro is still far from its record low against the dollar, close to 0.8 in 2001 ...The Euro is far from hitting the bottom against the dollar, he even has done quite well given the systemic risk now surrounding the debt of European countries.

The markets also have their own vision, and as regards the euro area can hardly be worse debt beyond the reasonable prospect of sluggish growth, budget deficits without substantive social and pension system close to bankruptcy , and (this is a novelty, unlike other bad news) icing on the cake: one or more states close to the default.

Those who look to Greece for an official look at their cash flow problems were not entirely right: there is a difference in level between the situation in Greece and that of France at this moment, no Nature.

A welfare state based on a mountain of debt

In fact the social contract that underpins France and others countries of Europe is financially obsolete. Basically, it requires the following commitment: just give us half your salary in payroll taxes, 15-20% of everything you eat (VAT) and a variable amount (from 10-40%) of the remaining in Income taxes, and in exchange you will have free health care throughout your life, and a decent retirement.
The problem is that this golden promise is funded since 1973 on borrowing (1973 is when the last budget surplus happened in France) … If France were a company or a mutual fund, it would easily qualify for the Guinness Book of Record of the longest “Ponzi scheme” of the history of finance.

Actually if Bernard Madoff was not already busy for the next 150 years, he would make an excellent Prime Minister for France. With Lehman Brothers as Budget secretary : they would find some way of selling the deficit of health insurance, and pension in the form of CDOs (collateralized debt obligations) and sell them to suckers.

Your retirement? Go ask Beijing.

Too bad for those who have trusted apprentices Madoff who ruled France for 35 years: they now have as much chance of recovering their only going to play cards on cardboard boxes Boulevard de la Chapelle.

Indeed one can always find good excuses (making the rich pay for the poors, the tax shield, the 35 hours paid 39, the evil capitalists who have 80% of their headquarters in the Netherlands and Luxembourg … etc.) to not repay borrowings from the French. Just simply to issue additional bonds or raise taxes to pay the French with their own money …. Easy. But doing so with sovereign funds and investors is not that easy (1).

And indeed, our creditors are starting to ask some questions about our ability not to repay our debt as did Sweden and Canada (no one thinks seriously it will happens), but simply meet our deadlines. This is euphemistically called the “sovereign risk” for a country, and bankruptcy for the rest.

Especially that last 30 years the French have shown they know how to mobilize and roll up their sleeves to tackle the crisis and their future: a big strike of public servants and employees and increase the VAT, the CSG, taxes etc … until the next election. By now, French are accustomed to running into the wall happily, but try to explain this to the Chinese …

Olivier Languepin

(1). Approximately 60% of France’s public debt is held by non-residents.