Andrey Margolin: ‘You won’t have the prospect of big profitability in euro’
A Russian economist on the future of the currency of the Eurozone and if one should invest in it
An upsurge in oil prices to almost $42 and the election in the USA decreased the key world currencies a bit last week. However, the euro whose rate against the ruble was 94 rubles several days ago didn’t go below 90. In an interview with Realnoe Vremya, Vice Rector of RANEPA, Doctor of Economic Sciences Andrey Margolin reflects on if the European currency proved its power and if Russians should be buying it in the short run.
“They consider the euro will soon become a serious rival for the dollar”
Andrey Markovich, how would you characterise the euro now? How strong is this currency? Is it a candidate for a key role in the world?
Architects of the Eurozone have such ambitions, without doubt. They consider the euro will soon become a serious rival for the dollar and even win it. But nowadays the situation around the world is complicated because we are all experiencing the coronavirus epidemic, and the euro is also having significant problems in these conditions because if we look at Russian banks now, we will see that they are not offering any products in euro because their profitability is very low.
The Eurozone is experiencing colossal pressure in 2020 and especially now — the number of cases in the Eurozone’s leading countries is very high, the migration crisis is gaining momentum, and all this doesn’t help the euro get stronger at the moment.
Nevertheless, the euro in Russia in the last months has been a very expensive currency, if a dollar costs 78-79 rubles, a euro does 93-94. How can you explain this?
The reasons are historical. Of course, the pair of the euro and dollar is fluctuating, but the average rates have always been the same both like now and when we say that the exchange rate of the ruble against the euro falls, we mean our national currency, not the euro.
We can often hear that the euro rests on Germany’s economy. Is this true or are we given quite a simplified explanation for the euro’s power?
Without doubt, Germany’s economy is supporting structures of the Eurozone, moreover, now when Great Britain is leaving the Eurozone, one of the pillars of the European economy is disappearing.
But apart from Germany’s economy, the Eurozone has good economies of other states. For instance, it is the economy of the Netherlands — this economy is very capable and supports the strength of the European currency very well. Nevertheless, the euro’s feeling is very dependent on the situation in Germany’s economy.
Has Germany become a foundation of the euro in the last years or has this always been this way in history of the European currency?
From my point of view, it is a long story — the economy of Germany was the strongest when the countries of the Eurozone came together, it remains such even today, though it is obvious that Germany’s economy is experiencing hardships that a characteristic of the Eurozone in general today.
Nevertheless, the euro’s feeling is very dependent on the situation in Germany’s economy
Green energy and euro
How serious are the fears of some economic experts that the resignation of Germany’s Chancellor Angela Merkel next year can have a negative impact on the euro?
Here Merkel’s authority in the Eurozone is rather the point — it is really very big, moreover, Germany’s representatives occupy posts in European structures, suffice it to mention Ursula Gertrud von der Leyen (Editor’s Note: chairwoman of the European Commission since December 2019).
The economy of the Eurozone doesn’t rotate around Angela Merkel’s candidacy, of course. But there is an old saying “There was a cult, there was a personality too”, and here we have to admit that the current German chancellor plays a kind of stabilising role for Europe, even though Merkel hasn’t had the most constructive position in the relationships with our country recently.
When people talk about what the US dollar rests on, economists often talk about advanced world technological products like Amazon, Google, Facebook, Apple. What European products are holding the euro at the moment?
Nobody will reinvent the wheel here: but if we are talking about Europe, of course, we should be talking about, first of all, German mechanical engineering, here its merits shouldn’t be underestimated. However, technological accomplishments in alternative energy are gradually going to the forefront in Europe now. Though green energy won’t completely replace conventional, but this movement exists, and Europe sets the pace here, and it is very important to strengthen the euro. As we know, Europe has the world’s best health care companies, though this factor didn’t help Europe to cope with the coronavirus pandemic, as Europeans considered at first. However, neither did Americans cope with this problem and still are having colossal tension in this respect.
What products the euro rests on can be singled out from the economy of the Netherlands you have mentioned as a great example?
Look at their market of flowers — Holland isn’t accidentally named the country of tulips. The leadership in any market strengthens the country’s brand and provides a chance of acting in other segments quite effectively too. Moreover, it is important to note that everything that has to do with the agro-industrial complex in Europe and the Netherlands is developed amazingly, and precisely the Netherlands feels very confident in this respect.
Russians could hear statements from different people about a future collapse of the dollar, especially in the 2000s. But nothing was heard about a possible collapse of the euro. Does it turn out that it is ridiculous and stupid to talk about it?
Indeed, it isn’t said about a collapse of the euro, but after Brexit and at the beginning of the pandemic when nobody helped Italy, these moods were strong enough. As for that tension the Eurozone is experiencing because of migration problems and due to those terrorist attacks that recently took place in Europe, they shouldn’t be disregarded either.
In fact, nobody is interested in the Eurozone’s collapse as such, of course, but there are a lot of problems — a lot of authoritative people are saying now that the intellectual leadership of Europe is lost, that the Eurozone is managed quite poorly, and the fact that Europe can reply nothing to the rhetoric of Turkish leader Erdoğan, which has recently been heard, is an example of it.
But let me say a little about the dollar, here we see a long-term argument: representatives of bank structures believe in the dollar, they recommend their clients not to fear of a possible collapse of the dollar, but the USA’s debt anyway boggles the mind, and all problems of the country can’t be solved by printing dollars. And now the country is split into two camps, and we see it in the election that took place in the States. Everybody has a lot of problems, but Russian problems always concern me more — we should develop despite the accomplishments and mistakes our potential partners make.
Of course, the pair of the euro and dollar is fluctuating, but the average rates have always been the same both like now and when we say that the exchange rate of the ruble against the euro falls, we mean our national currency, not the euro
“Europe doesn’t have a total lockdown now anyway, and nobody wants it there”
However, Mr Margolin, you see serious dependence of the spheres of our economy on the rate of currencies, the same euro. And nothing so far is seen that could reduce this dependence.
I don’t agree with it. There is a very decent and amazing country, Switzerland, and if a global crisis begins (while there is more than enough prerequisites for it), a question arises: what will happen to the country with ski resorts, with the production of expensive watches, with the production of costly Swiss knives and even cheese? This demand won’t be probably good, but I don’t doubt that the Swiss are smart and they find a solution, though they will have to think very seriously.
As for Russia, first of all, we should build roads, housing, develop health care — we have a lot to do in the so-called basis of Maslow’s hierarchy, that’s to say, we should meet the population’s basic needs. The underdevelopment of our domestic market is the area of the country’s movement, and if we invest precisely in these spheres, we will be able to resist sanctions and cataclysms in the foreign market for quite a long time. Management of these problems can give us a chance of significantly reducing the dependence on world markets.
Of course, we have to recognise that Russia has a technological dependence on the West — we lost the competence in some sectors of mechanical engineering. But it doesn’t mean we have to “close” our own economy — this can’t be done in any case, but it is compulsory to restore critically important technological chains inside the country from a perspective of security. Yes, all this requires investments and training of a qualitatively new engineering elite — there are a lot of issues, and if this becomes a reality, the rate of the dollar or euro will become secondary for Russia.
Europe’s countries are declaring lockdowns one after another. The same happened in the spring, but the euro withstood, despite some decline in the economy. Is it a surprise or evidence of that Europe’s economy is incredibly strong?
The safety margin of the European economy is great — this is true and the main explanation. But Europe doesn’t have a total lockdown now anyway, and nobody wants it there. Moreover, the economy of Europe anyway gradually moves forward, though slowly. I think today’s power of the euro is explained by the fact that almost all states have problems around the world, which means if the ratio of currencies before the pandemic was two to one, it won’t change now.
Is the mutual dependence of the dollar and euro strong?
It is great because the amount of global commerce between Europe and the USA is very serious. Moreover, the following is interesting: traditional channels of commerce between them are connected with maritime and Atlantic shipping, but they are full and one has to look for new channels, for instance, the Northern Sea Route. Nevertheless, global trade keeps both currencies in mutual dependence very much, but the same thing happens to China too because the PRC and USA have a huge commodity turnover, and despite contradictions, it preserves the influence not only on these two economies but also global economies in general.
Why does the USA try to be harsh towards Russia? Because we have the lowest commercial turnover because the USA thinks it doesn’t depend on Russia and can do whatever towards Russia — it is afraid of doing whatever but feels its confidence.
The safety margin of the European economy is great — this is true and the main explanation. But Europe doesn’t have a total lockdown now anyway, and nobody wants it there. Moreover, the economy of Europe anyway gradually moves forwards, though slowly
“The mutual dependence of Europe and the USA is great”
Who is interested in each other more, Europe in the USA or on the contrary?
There is mutual interest — we all see Donald Trump say about the return of production territories to the USA (his slogan “Make America Great Again!” was based on this), and though the transition of productions wasn’t from Europe but mainly from China, he made several statements to Europeans that European partners weren’t honest with the USA. Yes, there are contradictions, but the mutual dependence of Europe and the USA is great.
Analysts recently concluded that it was profitable for Russians to invest in the euro in the spring. Now the factor of coronavirus has aggravated again, and the euro has exceeded 94 rubles. Will the European currency top other summits? Should one be investing in it?
To be honest, I try not to advise on investing money in some financial instruments — it is anyway the business of those who earn money on financial markets, while my position is always very simple: a person should earn where he feels he is a professional. You know, everything depends on the type of the person — some people are conservative or like me who prefer reliable financial instruments, while there are more aggressive people who are ready to risk to increase the income. But back to your question about the euro, I want to say that the main part of the growth of this currency has been received, this is why you won’t have the prospect of big profitability in euro (if only the exchange rate changes).
As for bank products, deposits, bonds, their profitability is disappearing and low.
Can the euro go above 100 rubles and more?
Whatever can be assumed, but there is plenty of various factors now. For instance, we don’t know what will be happening to the coronavirus pandemic, while this can influence currencies very much.