EUROPEAN CURRENCY UPDATE
THE BIG DEBATE, HAS THE EURO BEEN A SUCCESS SO FAR?
NO SAYS BILL ROBINSON
In order to answer “Yes” to this Big Debate question, it would be necessary for all the current EU members to have taken the new currency up as their own.
This has not occurred. There’s been a lot of what I would call “fragmentation”, with countries either refusing outright or generally taking a 'wait and see’ attitude to adopting the euro. So I say no, it has been less than successful because EU states that were unconvinced two years ago remain so. Indeed, the Swedes voted against the common currency in a referendum last year.
There are 31 nations, states and territories using the euro, including seven French and five Spanish overseas territories, two Balkan states, Kosovo and Montenegro, and strangely enough Cuba, where the Euro has been designated as the official currency at one of the biggest beach resorts. The rest of Cuba uses the Cuban peso, which is tied to the US dollar.
While this kind of offbeat proliferation of the euro is interesting, it does not mean that it will be taking over the world, at least not anytime soon. Pegging a currency to the euro is also somewhat popular amongst African countries such as Cameroon, Chad and the Ivory Coast, while Cyprus and Euro-holdout Denmark tie their krone to the EU currency.
The ten countries joining the EU in May 2004 are Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. Experts are convinced that all ten will adopt the euro within a couple of years. We will see. The euro began on far from solid ground - people and countries were frightened by its fluctuations - and only recently has it begun to rise, although in what I would call a rickety way.
The real litmus test will be to see which of the new entrants to the EU take it up energetically, which take it up begrudgingly, and which refuse it altogether. If any of the euro’s old value volatility returns, look out for even the smallest new members to reconsider or decline entirely.
I’ve not heard anybody else stick their neck out on a statement like this, but I will now: the success of the euro is by no means assured. Failure would mean it hanging on for up to a decade but then because there are so many non-participants, the EU decides to give the euro the sack. (If my prediction proves true, remember you heard it here first. If not, forget anybody ever said it and never, ever attribute it to me).
Vaclav Klaus, President of 2004 entrant to the EU the Czech Republic, was recently quoted as saying that Europeans are “living in a dream world” filled with all manner of government entitlements, welfare, long vacations and freebies. Mr. Klaus also warned the EU’s citizen-passengers, that they “are not moving toward some sort of nirvana”.
It doesn’t seem to me that the Czech leader is likely to go quietly with the bureaucratic EU regulatory police or even adopt the euro unreservedly, especially when big players like France and Germany are still struggling to find a comfortable fit within a unified Europe. At the end of November last year, eight EU countries voted to overrule the European Commission and allow France and Germany to escape penalties for breaching the rules of the Stability and Growth Pact. France’s Le Monde reported the decision as “a slap in the face for the European Commission”, and added that “nobody knows how the Commission and the Council [of Ministers] will be able to act in future against other countries whose public finances get out of hand”.
Interesting sidebar: the French gave up the franc they had been using since 1795. The Dutch guilder has disappeared after first appearing in 1816. 1832 was the year Greece started using the ancient drachma, while Belgium’s defunct franc was born in 1833. 1860 and 1861 respectively are when the Finns’ outmoded markka and Italians’ archaic lira were first used. Spain’s obsolete peseta first changed hands in 1869. Am I the only one who finds it extraordinary that currencies so long in use would be so quickly and easily thrown over for a monetary experiment?
Sweden, Denmark, non-EU member Switzerland and the UK remain significant holdouts in the euro’s uptake.
I don’t believe that Britain will ever relinquish its dear pound sterling, and will choose to remain with its own currency for evermore. Nobody really knows - not even Blair and Brown - but I do think the UK will never subject itself to a German/French dominated ECB. As long as Great Britain, one of the world’s top economies, goes it alone, many other newcomers to the EU might choose to participate but retain their own national currency identities.
I’m confident that the disparity between the levels of commitment of the culturally-incongruent euro-using countries will eventually lead to widespread disagreement followed closely by acrimony and an unravelling of the euro’s popularity. I simply cannot see the euro living happily ever after in one big monetary knees-up. It would simply be inconsistent with the very energetic way the Europeans have of going after each other’s throats and fighting like cats and dogs.
No. The euro has not been a success two years on, nor will it prove to be two years hence.
Bill Robinson has appeared on CNN, PBS, Sky News and Bloomberg commenting on high-tech and marketing issues. He has written for The Financial Times, Wall Street Journal Europe, Fortune Small Business, Marketing Magazine and Forbes.com. firstname.lastname@example.org
YES SAYS NATASHA STARKELL
When was the last time that you thought about going to a bureau de change so that you could buy beer on your travels between Europe’s major cities? A pocket full of euros makes travel more convenient, but the true measure of this new currency’s success is in the economic strength and stability it brings to Europe as a whole.
Just as the euro is a source of convenience for the individual, the single currency is more convenient for companies that operate on a pan-European level, which in turn promotes increased trade. Gone are extra profits and losses made by currency fluctuations at cross-border transactions, with the margins previously captured by intermediaries staying within the business. The savings made from reduced transaction costs in the United Kingdom alone are predicted to measure £1 billion annually.
The UK is an interesting sample case when considering the success of the euro. Britain has a relatively strong economy and has traditionally viewed itself as somewhat removed from Europe, but lower transaction costs for businesses and consumers, diminished exchange rate volatility, greater cross-border trade and lower interest rates will all prove tempting. The introduction of the euro in Continental Europe has already led to expanded trade between the eurozone countries and the United Kingdom, and the introduction of the euro in the UK is projected to result in further growth of up to 50% over the next 30 years. Have you noticed, during your recent easyJet travels, that prices on Continental Europe are beginning to rise? The strengthening of the euro against the dollar, pound sterling, CHF and other major non-euro economies is testament to the stability beginning to settle in the eurozone. The eurozone Purchasing Mangagers’ Index, for example, reported that Europe’s manufacturers saw business grow for the third month in a row in November, with global growth bolstering European factories. There’s no doubt that continued growth will depend on the health of business worldwide, but this is the sort of stability that champions of the euro will trumpet as evidence of success.
THE INTRODUCTION OF THE EURO IN THE UK IS PROJECTED TO RESULT IN TRADE BETWEEN EURO ZONE COUNTRIES AND THE UK INCREASING BY UP TO 50% OVER THE NEXT 30 YEARS
Stability will also be important to the accession countries when deciding whether to adopt the euro. Clearly the benefits to Poland, Latvia, et al when joining the European Union are substantial. Joining the euro should mean their monetary policies become more predictable and their finances less fragile. Price levels are also expected to even out in the eurozone, leading to the balancing out of salary levels as the local businesses pocket higher profits and pay European salaries to their employees.
In any event, it is expected that the new EU members will have to satisfy the five tests established by the Maastricht treaty in order to join the euro. The success of each individual country to satisfy those criteria will influence the scale of benefits that those countries can derive from being members of the EU.
The unification of the capital markets across major European cities creates tremendous efficiencies. The increased liquidity and range of financial services offered across the eurozone attracts international investors and issuers. The risk to financial institutions is significantly reduced, as it absorbs the variations in the economies that cancel each other out in the shorter term.
Sweden, underestimating the benefits of joining the euro, remains an outsider, protecting its lower unemployment, higher growth and generous welfare packages. Just as a political leader vying for election will promise immediate tax reductions followed by stealthy increases in the future, the Swedes should weigh the trade-off between immediate clearly specified benefits, and less certain benefits in the future. The benefits for businesses are likely to be great, but the measurable impact on one’s bank account is less predictable. And as long as the redistribution of such benefits threaten the population on an individual level, the caution taken while voting for such dramatic change to the country’s economy and loss of independence is understandable. The result of the poll shows that even on the individual level a substantial part of the population appreciate the future advantages of the eurozone. Despite the clear and current benefits enjoyed by Swedes, 41.8% were willing to push ahead with the euro, and the issue was generally seen as important enough to draw a turnout of 81.2%.
Simplification and efficiency have been a driving force of economic and innovative progress throughout modern history. One cannot glance in the crystal ball and say by how much the growth of the US economy would have been impeded should each individual state have operated its own currency over the last few centuries. The organisation and implementation of eurozone enlargement and the role of the European Central Bank are significant factors in achieving the aims of the euro, but currency markets are already pointing us to the right conclusion, that euro is the way forward.
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