Currency Carries Big Hopes
Its potential is awesome: one currency linking the buying power, skilled labor and business know-how of 303 million people in 12 countries--one-sixth of the world’s economy.
On the eve of the Jan. 1 introduction of euro notes and coins, supporters hope the euro has only begun to show what it can do, predicting historic dividends in growth and trade--and even in peace and security.
Economists say the shared currency has had benefits since it was launched three years ago, not in the form of paper bills and coins but as a peg to which national currencies were fixed.
It has eliminated the problems of exchanging money for businesses trading across borders. But the more expansive hopes--such as a long-lasting boost to growth and a political push to loosen stifling labor regulations--have yet to appear.
The idea behind the euro is simple: End fluctuations between national currencies, and cross-border trade grows. Competition is increased, pushing countries to further liberalize their economies and become more cost efficient.
The euro has eliminated currency risk--the chance that a sudden shift in the exchange rate will sap businesses’ profits or balloon their costs. And they no longer pay the commissions and costs of exchanging money.
For instance, before the euro, if an Italian bank wanted German bonds, it had to bundle the purchase with a currency swap--a time-consuming foreign exchange deal guaranteeing they could repatriate gains without losing their shirts.
New cross-border bond markets have blossomed, providing sources of credit that businesses across the zone can tap into, to expand factories and production.
When the notes and coins arrive, cash-carrying tourists will reap some of those same benefits, speeding from aircraft gate to the taxi without paying a 3% commission at the foreign exchange booth. And prices will be instantly comparable across borders.
These pluses are thought to offset the costs of countries’ giving up independent monetary policies to the European Central Bank. Members can no longer cut interest rates to spur their economies out of recession, or put a lid on inflation during boom times.
That loss of control was one reason three EU members--Britain, Sweden and Denmark--stayed out of the euro.
Robert Mundell, a Columbia University economist whose writings provided much of the theory for the euro, says labor and capital should be able to flow across borders to help countries adjust to economic ups and downs, in the absence of a national monetary policy.
“My own view is that the euro area as it is at present will be successful, but that it would be an even greater success if it were joined by the remaining three ‘outs,’” said Mundell, a euro supporter who won the 1999 Nobel Memorial Prize in economics for work including his analysis of currency zones.
