The Euro! Single Monetary Currencey.

[Neiler]

As many may know i live in Ireland and as such we arwe part of the European Single Monetary Unit i.e. the Euro is our main currencey.

Was just thinking today about the Euro as a currency and the advatages and disadvantages of being in the Single Monetary Community in the current credit crunch. Is it better to be part of a wider financial currency across a larger economic zone, or is it better to be like the Uk and remain soverign to have a greter power over decisons made at an indigigious level?

Just to bet a debate going heres some pros and cons i pinched form other wenistes!



Advantages:
1. A single currency could end currency instability in the participating countries (by irrevocably fixing exchange rates) and reduce it outside them. Because the Euro would have the enhanced credibility of being used in a large currency zone, it would be more stable against speculation than individual currencies are now. An end to internal currency instability and a reduction of external currency instability would enable exporters to project future markets with greater certainty. This will unleash a greater potential for growth.

2. Consumers would not have to change money when travelling and would encounter less red tape when transferring large sums of money across borders. It was estimated that a traveller visiting all twelve member states of the (then) EC would lose 40% of the value of his money in transaction charges alone. Once in a lifetime a family might make one large purchase or transaction across a European border such as buying a holiday home or a piece of furniture. A single currency would help that transaction pass smoothly.

3. Businesses, involved in commercial transactions in different member states, would no longer have to face administrative costs of accounting for the changes of currencies, plus the time involved. It is estimated that the currency cost of exports to small companies is 10 times the cost to the multi-nationals, who offset sales against purchases and can command the best rates.

4. A single currency chould result in lower interest rates as all European countries would be locking into German monetary credibility. The stability pact (the main points of which were agreed at the Dublin summit of European heads of state or government in December 1996) will force EU countries into a system of fiscal responsibility which will enhance the Euro's international credibility. This should lead to more investment, more jobs and lower mortgages.

Disadvantages:

1. Countries with widely differing economic performances never before attempted to form a monetary union. It works in the United States because the labour market is mobile, helped by the common language and portability of pensions etc. across a large geographical area. Language in Europe is a huge barrier to labour force mobility. This may lead to pockets of deeply depressed areas in which people cannot find work and areas where the economy flourishes and wages increase. While the cohesion funds attempt to address this, there are still great differences across the EU in economic performance.

2. If governments were obliged through a stability pact to keep to the Maastricht criteria for perpetuity, no matter what their individual economic circumstances dictate, some countries may find that they are unable to combat recession by loosening their fiscal stance. They would be unable to devalue to boost exports, to borrow more to boost job creation or cut taxes when they see fit because of the public deficit criterion. In the United States, Texas could not avoid a recession in the wake of the 1986 oil price fall, whereas demand for Sterling changed in the light of the new oil price, adjusting the exchange rate downwards.

3. All the EU countries have different cycles or are at different stages in their cycles. The UK is growing reasonably well, Germany is having problems. This is the reverse of the position in 1990. Since the war the UK economy has tended to have an economic cycle closer to the US than the EU. It has changed because interest rates are set in each country at the appropriate level for it. One central bank cannot set inflation at the appropriate level for each member state.

4. Loss of national sovereignty is the most often mentioned disadvantage of monetary union. The transfer of money and fiscal competencies from national to community level, would mean economically strong and stable countries would have to co-operate in the field of economic policy with other, weaker, countries, which are more tolerant to higher inflation.
5. The one off cost of introducing the single currency will be significant. The British Retailing Consortium estimates that British retailers will have to pay between £1.7 billion and £3.5 billion to make the changes necessary. Such changes include educating customers, changing labels, training staff, changing computer software and adjusting tills.


So is it better to be in or out?

 

[Bruce Wayne]

#3 in the ney column is it for me. Monetary policy should be as localized as possible. The single currency prevents that. For instance rather than the Bank of England giving us a rate cut when we needed it we'd have to rely on whatever the ECB gave us. No thanks.

The whole issue of charges when changing currency is one that shouldn't exist in this day and age. I don't think the cost of moving is a huge issue either. After all I dare say the VAT changes announced this week will also cause some problems as most computer systems, especially supporting ecommerce sites, will have 17.5% hardwired in there.

 

[toffeestillidie]

As many may know i live in Ireland and as such we arwe part of the European Single Monetary Unit i.e. the Euro is our main currencey.

Was just thinking today about the Euro as a currency and the advatages and disadvantages of being in the Single Monetary Community in the current credit crunch. Is it better to be part of a wider financial currency across a larger economic zone, or is it better to be like the Uk and remain soverign to have a greter power over decisons made at an indigigious level?

Just to bet a debate going heres some pros and cons i pinched form other wenistes!



Advantages:
1. A single currency could end currency instability in the participating countries (by irrevocably fixing exchange rates) and reduce it outside them. Because the Euro would have the enhanced credibility of being used in a large currency zone, it would be more stable against speculation than individual currencies are now. An end to internal currency instability and a reduction of external currency instability would enable exporters to project future markets with greater certainty. This will unleash a greater potential for growth.

2. Consumers would not have to change money when travelling and would encounter less red tape when transferring large sums of money across borders. It was estimated that a traveller visiting all twelve member states of the (then) EC would lose 40% of the value of his money in transaction charges alone. Once in a lifetime a family might make one large purchase or transaction across a European border such as buying a holiday home or a piece of furniture. A single currency would help that transaction pass smoothly.

3. Businesses, involved in commercial transactions in different member states, would no longer have to face administrative costs of accounting for the changes of currencies, plus the time involved. It is estimated that the currency cost of exports to small companies is 10 times the cost to the multi-nationals, who offset sales against purchases and can command the best rates.

4. A single currency chould result in lower interest rates as all European countries would be locking into German monetary credibility. The stability pact (the main points of which were agreed at the Dublin summit of European heads of state or government in December 1996) will force EU countries into a system of fiscal responsibility which will enhance the Euro's international credibility. This should lead to more investment, more jobs and lower mortgages.

Disadvantages:

1. Countries with widely differing economic performances never before attempted to form a monetary union. It works in the United States because the labour market is mobile, helped by the common language and portability of pensions etc. across a large geographical area. Language in Europe is a huge barrier to labour force mobility. This may lead to pockets of deeply depressed areas in which people cannot find work and areas where the economy flourishes and wages increase. While the cohesion funds attempt to address this, there are still great differences across the EU in economic performance.

2. If governments were obliged through a stability pact to keep to the Maastricht criteria for perpetuity, no matter what their individual economic circumstances dictate, some countries may find that they are unable to combat recession by loosening their fiscal stance. They would be unable to devalue to boost exports, to borrow more to boost job creation or cut taxes when they see fit because of the public deficit criterion. In the United States, Texas could not avoid a recession in the wake of the 1986 oil price fall, whereas demand for Sterling changed in the light of the new oil price, adjusting the exchange rate downwards.

3. All the EU countries have different cycles or are at different stages in their cycles. The UK is growing reasonably well, Germany is having problems. This is the reverse of the position in 1990. Since the war the UK economy has tended to have an economic cycle closer to the US than the EU. It has changed because interest rates are set in each country at the appropriate level for it. One central bank cannot set inflation at the appropriate level for each member state.

4. Loss of national sovereignty is the most often mentioned disadvantage of monetary union. The transfer of money and fiscal competencies from national to community level, would mean economically strong and stable countries would have to co-operate in the field of economic policy with other, weaker, countries, which are more tolerant to higher inflation.
5. The one off cost of introducing the single currency will be significant. The British Retailing Consortium estimates that British retailers will have to pay between £1.7 billion and £3.5 billion to make the changes necessary. Such changes include educating customers, changing labels, training staff, changing computer software and adjusting tills.


So is it better to be in or out?

good breakdown of the issues. number 5 seems surprising tbh, is it that difficult to get people to handle a new type of currency? another problem you may associate with unified currency though, is that the change would disproportionately effect people with lower financial literacy, who tend to be lower income to begin with. when prices everywhere change, many poor people won't quite know if their mortgage payment plan is fair, etc.

i'm really not sure what would be better, simply because i don't know much about finance in europe. in the US, most states don't have the infrastructure to be entirely economically independent (though some would argue that texas is a notable exception), so a unified currency is entirely necessary.

tbh i think i'm leaning towards one currency, just for your arguments about efficiency. what i wonder though, is how would the change effect financial institutions who gained a great deal of revenue off these transaction costs? would they be hurt even more?

 

[Nebbiolo]

good breakdown of the issues. number 5 seems surprising tbh, is it that difficult to get people to handle a new type of currency? another problem you may associate with unified currency though, is that the change would disproportionately effect people with lower financial literacy, who tend to be lower income to begin with. when prices everywhere change, many poor people won't quite know if their mortgage payment plan is fair, etc.

i'm really not sure what would be better, simply because i don't know much about finance in europe. in the US, most states don't have the infrastructure to be entirely economically independent (though some would argue that texas is a notable exception), so a unified currency is entirely necessary.

tbh i think i'm leaning towards one currency, just for your arguments about efficiency. what i wonder though, is how would the change effect financial institutions who gained a great deal of revenue off these transaction costs? would they be hurt even more?

I think Bruce mentioned a country losing sovereignty over some of its economic affairs (specifically interest rates). This to me seems quite a dangerous path to go down, or could it be the case that somehow a sovereign state is allowed a certain amount of leeway in adjusting its economy to suit its own needs, rather than the needs of an increasingly large number of member states?

There is also the "we're losing our identity" argument to ponder on. Okay, compared to all the wars and starving people in the third world, the social identity of a state is not particularly important. In spite of that, the single currency strikes me as just being one further step into that world that is gray, uniform and drab. All these little traditions that Europe has are not bound to having distinct currencies, though. I'm sure we'll survive reasonably intact with the Euro. However, I find the idea unappealing and distinctly Weberian in its march into a world where everything is quantified, weighed and put into sets so we can maintain and increase efficiency. I admit that this little rant has a touch of the ad hominem about it. I just like the British pound and the Danish krone.

Last, I know from my relatives in Germany that the change to the Euro did cause some confusion and profiteering. Indeed from what I heard, the least financially literate did happen to be the people that suffered the most. But whether this would rule out a switch is debateable since the greater good might indeed be realised by the Euro.

But as you can tell, I'm a complete dunce when it comes to economics. My main reason for not wanting the swap is social, not economic. So if indeed we do go for it over here, and you guys go for it in the UK, I'll just end up relying on the word of the experts since I do not intend to spend some weeks and months studying economic theory in an expanding Europe.

 

[Neiler]

#3 in the ney column is it for me. Monetary policy should be as localized as possible. The single currency prevents that. For instance rather than the Bank of England giving us a rate cut when we needed it we'd have to rely on whatever the ECB gave us. No thanks.

The whole issue of charges when changing currency is one that shouldn't exist in this day and age. I don't think the cost of moving is a huge issue either. After all I dare say the VAT changes announced this week will also cause some problems as most computer systems, especially supporting ecommerce sites, will have 17.5% hardwired in there.

I suppose what we have seen recently thoough means that the Uk has to follow the lead from Europe anyway mate, many EU memebr sates took the decison to bail ot the banks before the EU finally cvameon bored which meant meant that the UK did to as it could not operate economicly in Europe with other banks in Europe having a leg up. So while in theory there is soverenity while in practice in order to survive to the UK must also mirror what the Eurozone and ECB does.

I suppose the downside from a British perspective is also that while it is to a degree having to mirror what the ECB decides to do, but it also missed out on the all time low intrest rates for the past five years, where they were remarkably lower then the UK prices, indeed theve been a cut a full percent in the past 4 months, after climbing signifcantly in the past year.

I suppose for selfish reason i want Britain to remain with the pound as it is likely to mean startegicly more trade for Ireland both form Europe but also world wide. But it has to be said much of Irelands recent economic growth in the last four years could arguably be in part attributed to joining the Euro as well as Britain reluctence not to.

 

[Bruce Wayne]

A couple of things.

Firstly I'd say that much of Irelands success over the past decade has been to do with their tax regime rather than their decision to join the Euro.

Secondly using the current situation is perhaps not the best example because it is a global cock up that requires a global solution. Most of the time things aren't like that and individual countries inevitably grow/shrink at different rates. This requires a unique approach to fiscal policy. Lets imagine instead of a Euro currency there was a fixed global currency. Do you think it's right that Britain has the same economic policy as Zimbabwe? Clearly an extreme example but you get the idea.

 

[Neiler]

A couple of things.

Firstly I'd say that much of Irelands success over the past decade has been to do with their tax regime rather than their decision to join the Euro.

Secondly using the current situation is perhaps not the best example because it is a global cock up that requires a global solution. Most of the time things aren't like that and individual countries inevitably grow/shrink at different rates. This requires a unique approach to fiscal policy. Lets imagine instead of a Euro currency there was a fixed global currency. Do you think it's right that Britain has the same economic policy as Zimbabwe? Clearly an extreme example but you get the idea.

Well your right Bruce, i did say i beleived it was one of the factors, but your right the tax concessions also were a contributing factors, but as an international centre for importing and exporting it is a more finnancialy benifical situation for Multi Nationals to set up european operations then Britain, especially when you look at the cost of importing and exporting under a single currency rather then sterling with the associated charges.

Do you not think that in some ways Britain autonomy is comprimised in that at times it must fall into line with the ECB in order to remain competitive? I hear Gordon Brown hit the roof when he heard about the bank bail out and had to change much of his fiscal policy in terms of dealing with the credit crunch.

No i think your right mate, i know your example is extreame, but it illustrates your point perfectly. Before joining the single currencey there are rules and criteria that mameber states must meet before joining which create if you will a degree of homostasus amoung memeber nations financialy, at least enough so that the balance and equity between the nations isnt significanlty in contrast.

Anyhow as i say im happy for Britain to stay with the Stirling, but for me i think the euro has been great for our country, Europe in general in terms of development, and i suppose personaly from an intrest rate point of view, i think if i the irish central bank were still controlling intrest rates id be paying through the nose!

 

[Bruce Wayne]

Bit late in the day for economics talk mate I shall return in the morning.

 

[Bundy]

Its all part of the one world government yadda yadda. USA practically just signed over there economy to Europe as well so that weird little French Prime Minister who looks evil can control it all.