Reply to Ron Paul’s views on the European financial framework

Hello folks.

A while back I posted an article by Ron Paul in which he expressed his opinion that the current European debt crisis threatens the dollar. I received a few e-mails from my readership expressing both agreement and disagreement with Mr. Ron Paul’s viewpoint. One of them stood out though, and I thought I’d publish it because I believe it is important to get a different side of the story. This e-mail came from a currency specialist from a popular UK forex brokerage firm. Letter follows below:

–begin letter–

Hi Alan,

I read with great interest your recent post written by Ron Paul, evaluating the problems with continuing to support the ailing European financial framework and the cost of US involvement in this.

On most points I think Mr. Paul makes a convincing case. For instance, he is right to point out the dangerous position of the US as global lender of last resort. In spite of White House remarks to the contrary, it does seem that significant US funds have gone to propping up the European system in the last six months. This creates dangerous US exposure in addition to that already shouldered by US banks and financial funds. In addition he is right that the cost of a breakup of the Eurozone is overestimated. Recent reports by banks including UBS for instance (detailing the possible cost should either Germany or Greece exit the euro) have been branded gross exaggerations and sensationalist. These are the product of organisations that stand to lose in the event of a euro breakup and so are engaged in scare mongering.

In spite of this though, it seems to me that in his eagerness to avoid exposing the US to the European crisis, Mr. Paul overextends his case. For example he tells us it is impossible to bail out either France or Germany, as opposed to small European countries such as Greece. True enough, but this of course gives an immediate (and misleading) impression that France and Germany are in need of bailing out. This is not the case: both nations possess (for the moment!) AAA credit ratings from all 3 credit rating agencies, unlike (it is worth pointing out) the United States. In other words it seems that here Mr. Paul is not above a little scare mongering himself. In addition it seems that, though European organisations have to date provided an exaggerated impression of the cost of a euro breakup, Mr. Paul gives us an underestimation. He notes for instance that Greeks are using bartering as an alternative to euros, as though this were a pseudo-democratic uprising against failing financial structures. Is he then suggesting that the entirety of Europe do the same thing? This strikes me as an irresponsible and (in the hands of an elected politician) dangerous underestimation of the crisis facing Europe.

In short, it seems to me that in spite of Mr. Paul’s admirable desire to see banks contribute to the cost of the financial crisis, he doesn’t grasp the scale of the European debt crisis. In particular, his proposed solutions are idealistic to the point of being fantastical.

Yours kindly,

Peter Lavelle
Foreign currency exchange specialist Pure FX