There has been a lot of talk of contagion during this Euro crisis. Contagion is the domino effect of a falling economy taking its less stable creditors over the edge, which in turn causes larger and larger economies to fall, unable to resist the infectious debt. Such is the incestuous nature of finance that this could feasibly take down the majority of the world economies; starting with one little trip. There is another contagion that worries the Eurozone, however, that is not spoken of, the contagion of faith.
The Euro is a fiat currency, which means that it has no substantial commodity (usually gold) underpinning it. This means that its value is derived from the faith in the issuing nation and the belief of the financial markets. Were Greece to be excommunicated, or worse, walk out during mass it would spend more than 40 days in the wilderness but it may just learn a thing or two, or at least appear to have. This is the most infectious idea that could be spawned. If Greece survived exile, and ultimately but painfully, it would, this would send a clear message to other suffering members to cut the cord.
The world’s financial markets are run by some of the most sharp, aggressive and secular intellects on the planet. They form long and short term strategies and know how to make the market move in their favour but a hint of a rumour of an idea from someone who knows the right people and all hell breaks loose. If traders believe something will happen, it happens because they will make it happen. Have you ever noticed how the news that someone is leaving a company or political position sends the markets into turmoil. For the last two years the markets have gone wild every time Steve Jobs looked a bit peaky or adversely when he was looking well. The markets draw conclusions from omens that are interpreted by the high priests to mean up or down.
The markets don’t know what to believe about the Euro, their fates are too closely linked to what everyone else believes, but their minds can easily be made up. If Greece and one other Eurozone economy lose the faith it could be more than the central bank can support.
For the time being, the big players in the Eurozone have faith that they can carry the currency and the market is willing to have faith in them.
So, if we stop believing in the Euro, will it cease to exist?…
…that depends on who we are.