Welcome to Euroland

by Jacob Oslick

Currency trading is about as much fun to write about as it is to talk about. That is to say, not much. So how can one spread word about an issue of phenomenal importance and immaculate boredom? Of course, I’m speaking about the Euro, the European Union’s attempt to unite all of Western Europe under the umbrella of a single currency. To help spice up the Euro’s introduction, EU bureaucrats are employing a variety of means. For example, they now publish a children’s comic book entitled “Captain Euro,” featuring a caped crusader heroically fighting hoards of evil, greedy currency traders. Even “Euroland,” the unofficial moniker for the territory where the Euro serves as legal tender, smacks as more befitting a theme park then a macroeconomic anomaly. Fortunately, Euroland won’t require a superhero to survive, and its progress so far indicates the currency transformation will more resemble a smooth ride in the country, not a roller coaster.

So what specifically is Euroland? Essentially, it constitutes an area stretching from Ireland to Finland to Italy, where member countries have agreed to give up national currencies. Thus, by 2002, no longer will German Marks, French Francs, or Italian Lira exist. Instead, people throughout the continent will conduct day-to-day transactions in Euros, the new currency. In the interim, the Euro replaces national currencies in all electronic transactions, allowing continent-wide, cost-free movements of capital. Eventually, its backers hope Euroland will extend into the former Soviet Bloc, and include current holdouts such as the United Kingdom, Greece and Norway.

So, now that we’ve established what the Euro is, we must ask: what costs and benefits will it bring? Here, the subject matter becomes more complex. On the surface, the Euro remains a simple economic change. Specifically, it will permit cost-free, cross-country investment. Currently, if a Frenchmen wants to invest in Germany, he must pay his workers in Marks. To do this, he must convert Francs to Marks, and pay a fee for the conversion. When he then sells this product in Germany, he receives Marks as profits. However, in order to actually spend these profits in France, he must reconvert them to Francs, again paying a transaction fee. Not only that, but throughout the duration of his investment, he must worry about Franco-German monetary policies. If for example, France holds to tight money, while Germany propagates inflation, the Franc will gain strength, sharply reducing the paper value of his German investment. The Euro eliminates this host of problems. As a result, we can expect that the Euro will promote increased multi-national investment, and by eradicating transaction costs, boost economic efficiency. It also ends the persistent problem of countries purposefully driving down the value of their currency to promote exports, triggering a devaluationary, harmful spiral in neighboring countries unwilling to see their trade balance decline.

The second benefit is more philosophical: the removal of politics from monetary policy. Specifically, many countries, such as Italy, traditionally fell victim to “election economics”: before elections, governments would print currency. In the short run, prices stay sticky, so the increase in the money supply accelerated growth. However, in the long term, growth in the money supply only pushes up prices, sends the shocks of hyperinflation throughout the country. In fact, polls indicate that Italy maintains such a staunchly pro-Euro position precisely because they want to get saved from themselves. With the introduction of the Euro, monetary policy shifts from national governments to a monolithic central bank, non-responsive to political pressure. Thus, the Euro’s introduction implies relatively stable European prices for the foreseeable future; the right environment for growth and investment.

Similarly, the Euro mandates stringent fiscal policies, and already has curbed reckless European spending. To qualify, Italy dramatically reduced its fiscal deficit, as did France. Not only that, but Euro members must keep their budget deficits below 3% of GDP, or face hefty fines. By keeping budget deficits low, the Euro should boost national savings rates – a key for igniting growth.

Lastly, the Euro could supplement the dollar as the world’s leading reserve currency. This will permit Europe a luxury the U.S. now enjoys: painless trade deficits. Essentially, many countries happily exchange goods and services for the little pieces of paper produced quite cheaply by the U.S. Federal Reserve Board. This amounts to the United States receiving an interest free loan: they give us things they worked hard to make, in exchange for our IOU’s that they never come to collect. However, with the Euro’s introduction, we can expect countries to balance their currency holdings by dumping dollars for Euros. In the short term, many economists are predicting a declining dollar. However, in the long-term our loss of a premier foreign currency position will only minimally damage our economy. At the same time, American businesses will magnanimously benefit from lower transaction costs on European investment, more than balancing out any loss.

So, assuming you stuck through my lecture of currency trading, you see that, although the Euro doesn’t exactly evoke the same kind of interest as say, the President quite literally trying to be the father of our country, it remains perhaps the most important global event since the collapse of communism. The Euro will simplify trade, help destatistize the European economy, and rival the dollar in international importance. For those students planning to travel to Europe in the next few years, it will also make travelling from country to country much simpler. Once it goes into circulation, prospective tourists will not need to change their money in each country they visit – and waste what they cannot spend. Thus, while you shouldn’t expect Captain Euro to replace Superman on the hierarchy of superheroes, his stature might place him above say, Aquaman. MR

This article was published in the 20 January 1999 edition of The Michigan Review (Volume 17, Number 6).
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