Gold and The Euro

The European Monetary Union (EMU) is scheduled to start by January 1, 1999. So far Luxembourg is the only country to fulfill the tight Maastricht criteria for joining the Euro, but it is nevertheless likely that most of the European Nations will be allowed to join the common currency. This will be made possible through higher taxes and creative accounting during 1997, and a somewhat permissive re-examination of the nations' good will in maintaining a "tendency towards achievement" of the two main criteria of the Maastricht treaty: (1) annual deficit at less than 3% of GNP, and (2) outstanding national debt at less than 60% of GNP. If necessary, an ultimate adaptation of the debt criteria could be adopted during the Amsterdam Conference of Governments scheduled in June '97.

Recent polls in Germany and France show that the man in the street is not yet convinced by the Euro. The French are afraid of loosing decision power in their national economic policy, whereas the Germans who have faced two major inflations in 1923 and 1947 fear that it will be all over for the mighty Deutsche Mark. The rulers have therefore scheduled a continentwide advertisement campaign in order to explain the advantages of the new currency to the masses.

At present, the German and French governments' main concern is preventing capital flight to save heavens like Switzerland, Liechtenstein, or Monaco. On the French side, a projected law for lowering the tax ceiling (which still stands at a staggering 85% of total income) was rejected in December, leading tens of Billions. of French Francs to Geneva. On the German side, a rather benign question by a Swiss opposition deputy regarding the usefulness of 40% backing of Swiss Franc by gold during recession times has been largely promoted by the press, so as to let the masses believe that gold backing of Swiss Franc is a matter of the past. There's literally no chance of success in the outcome of the referendum necessary for such a move.

There is no doubt that something is brewing in Europe: Rumors of Euro backing by gold, and of politicians buying physical gold, have been circulating in Germany since a few years. It is a well established fact that corporations and private investors in Europe have taken significant positions in Canadian and Australian gold exploration companies. The 1993 gold sales of the Central Banks of the Netherlands and Belgium have been seen as a move to level out gold reserves to approximately one ounce per capita throughout the future European Monetary Union. So far this officious target has not been seriously questioned, but still it should be stressed that if we take into account the quite likely future opening of EMU to eastern countries, this target would definitely be missed.

This led a few politicians, among those eager to fulfill Maastricht criteria ahead of their colleagues, to propose gold sales by their central banks in order to ease their debt burden. The logical conclusion of this kind of standpoint is that these politicians simply ignore how much money they owe, since not one European country has enough gold for paying a mere three months of interest alone on its public debt. It therefore appears very unlikely that any central bank gold sales will take place in order to achieve EMU criteria.

In the present state of the art of European central banking, gold is an asset of monetary reserve and the property of the individual nation's people. Handing over 14,400 metric tons of gold to the monetary reserves of the soon-to-be European central bank would require constitutional amendments in many countries. Which politician in any given country will take the responsibility for doing this? Furthermore, gold's potential role as a monetary reserve for trading goods may seem outdated to many European voters since Richard Nixon closed the gold window. The US is riding astronomically high trade and balance deficits without giving away its gold reserves. Europe would do the same if this situation occurred within its borders. Therefore, the use of European gold as a per capita reserve asset or as a monetary reserve for trade can reasonably be questioned in the present geopolitical and economic European environment.

However, European gold's potential role for backing the Euro as a new currency would have several political advantages which could prove to be decisive in the upcoming competition between US$, Euro, and Yen as reserve currencies:

1. Establishing confidence by the Europeans during the difficult start up phase
2. Prevention of flight of capital from present hard currency nations to Switzerland
3. Providing some resistance to challenge by FOREX traders
4. Allowing gold to remain within the present national central banks

The total amount of gold held by European central banks (14,400 metric tons) would fit very well for backing 100% of the needed amount of circulating Euro bills and coins (still, unlike Switzerland's holdings, it would be far from enough for backing the much larger monetary aggregate M1).

The definite decisions remain to be taken by Europe's present governments, but the global European political strategy lays at hand.

Orpailleur of France