Originally published May 2023.
Of the great many motives for one ‘labouring a point’, despite a backdrop of derision and dismissal, most are far from great. Of these, the most disagreeable is an unyielding stubbornness even when reasoning is churlish and, in the face of evidence, the assertion is plainly wrong. To be clear, my persistence is not founded merely on a strong fundamental conviction, but when I am convinced the shock — which I see blindsiding the consensus — threatens to be so costly, it will be felt by us all.
With the above in mind, let me repeat that such have been the economic stresses hitting the likes of Poland, Hungary, Romania, and Moldova, one will soon succumb to a devaluation which triggers the others to follow. I claim that the currencies of these nations are poised to weaken noticeably with the same conviction I held that the Turkish lira and Egyptian pound would do so. And devalue they have; with, be in no doubt, further lurches lower to come.
As to why I am so strident in making the dramatic claims above, the answer comes in two parts. The first is the backdrop of the sizeable real and monetary shocks which have struck those EU ex-eurozone economies, in the direct environs of what has unfolded in Ukraine. The second reason is the stubbornness with which the ECB is pushing ahead with a hawkish monetary stance. Pushing ahead, that is, with little or no consideration for the collateral consequences; i.e. the impact on the currencies of these nations governed by Exchange Rate Mechanism (ERM) II strictures that do not countenance their central banks ignoring how the ECB acts. Just as we witnessed Erdogan make his central bank sacrifice the lira rather than defend it with ever more elevated interest rates, I expect ‘the unilateralist’ Orban to follow suit. If the forint devalues, the Polish zloty and Romanian leu will not be that far behind. If Romania’s leu devalues, how on earth could Moldova’s leu hold firm? How too could Serbia’s dinar hold up, and Bosnia’s convertible marka? What then of the Albanian lek — even with its exceptional remittance support, could it withstand region-wide devaluations? Well, the idea these would somehow hold-up, could not hold up to any sensible scrutiny. And once devaluations do hit, inflation will surge anew.
