About the Euro

I feel quite attached to the euro, so it pains me that recently some people have been talking nonsense about it collapsing and disappearing.

I feel I have a personal stake in the euro in so far as I was there when it was launched. I worked as an interpreter in a lot of economic and financial meetings in the late 1990’s which were meticulously preparing for it. I remember Belgium passionately, and successfully, arguing its case for being let in even if its debt was way over the 60% threshold. I was there when the decisions were taken in May 1998 on membership and the exchange rates. The formal decisions had to be taken by the ministers of finance, for who I was working, in Council session. They were not best pleased that notwithstanding their careful preparation they (and we) were kept waiting hours while the heads of State and Government, as a matter of national pride, wrangled over who would be the first President of the new European Central Bank.

The single currency is one of the greatest achievements of the European Union. It is a bold endeavour. I remember one senior British government economist (typically) saying that it was a remarkable experiment and he was glad others were trying it to see whether it would work. The British Treasury at Gordon Brown’s request later undertook a vast twelve volume consideration of the possible advantages and disadvantages of UK’s joining and predictably reached no clear conclusion.

That is because in the end joining the euro is an act of faith. I use the word faith deliberately, as it is the essential nature of any currency that it is only worth what people are ready to believe it’s worth. We only accept bank notes, or these days numbers in bank accounts, as remuneration for goods provided and services rendered, because we believe other people will accept them in turn; without which the system breaks down and they are worthless. So whatever people seek to prove to you about the “fundamentals” of an economy behind a currency, if there is a crisis of confidence and a run on the banks, it’s of no use to you. Psychology is all important.
This is why I get cross about people deliberately talking down the euro (or any other currency) in order to provoke a climate of instability and therefore wild swings of fluctuation on the back of which speculators can make a killing and Joe Public lose his savings, when in fact there’s nothing seriously wrong with it.

Answer me this: the country with the biggest debt in the world is the United States of America; one of the states of the Union, and in fact the largest one economically, California is technically bankrupt and in cessation of payments - so is the dollar about to collapse and disppear ? No. So why should the euro disappear if one of the states in the euro area is near default ?

There is a problem with Greece: its deficit has been out of control for years as for decades people have become accustomed to milking a corrupt state. Incidentally I was also there when the decision was taken to let Greece join and I don’t remember any wild protests then about its debt being in excess of 100% of GDP (like Italy and Belgium who were already in). In retrospect, we now know that Greece only joined on the basis of having cooked the statistical books. However, ultimately that’s irrelevant, for although the decision to join is dressed up in economics it is essentially political. At the time the feeling was “the more the merrier”; if Greece joined that meant every one of the then 15 EU member states would be in, apart from the three who wanted out (UK, Denmark and Sweden).

Let’s get a sense of proportion here: Greece represents 2% of the GDP of the euro area (California accounts for 13% of US GDP). It’s a bit like discovering you have dry rot in 2% of your house. It doesn’t mean your house is about to fall down, but you will have to deal with it before it spreads.

The currency of any large country is an immoveable object, in the sense that it goes up and down in value, but it is here to stay. The idea that the US dollar might disappear is absurd as the USA is a large country. It beats me why some people say the euro is doomed; it is the chosen adopted currency of sixteen countries who together form the second most important currency zone in the world after the dollar. Given where we used to be, that is a great achievement of which others are jealous. The Americans don’t like to see the hegemony of the dollar challenged. No serious economist really believes the euro will disppear, but bad-mouthing it can stir up the “markets” to the advantage of a few speculators.

Nor will Greece ever leave the euro. There is no treaty provision for exit, the process is at one point in the texts described as “irreversible”. Anyway if Greece already cannot pay its debt denominated in euros, it would be insane for it to have a national currency worth even less.
So the euro is stuck with Greece, just as the dollar is stuck with California - but it’s strange how no one seems to make a big fuss about that.

The euro may well depreciate heavily. But what the hell ! Our goods priced in euros will become cheaper to the rest of the world, so we will export more: that means more jobs for Europeans. Conversely, we will import less from China. Who knows, as the euro goes down, the renmimbi may even appreciate to a level closer to its real value. Oil will become intolerably expensive so maybe we will finally do something about more efficient use of energy, which will be good news all round.

I am quite sanguine about the euro: I earn my money in euros and spend most of it in the euro area; what it is worth elsewhere in the world is largely irrelevant to me. Incidentally, that’s the same principle on which the US economy has always operated.

In the meantime the euro has made a huge difference to my private life. I live in a small country, Belgium and am soon over the border. To get around between say France, Germany, Italy and Spain I used to have a box full of different currencies which I periodically had to replenish, not any more. When I went out of Europe I first had to change my Belgian francs into something that would be accepted like US dollars or Deutschmarks, not any more.
I can now make cross-border bank payments and get money out of the wall in any euro area country free of charge using my Belgian bank account and card. I can also compare prices easily in a wide range of countries I visit. It’s all much simpler.

Of course, when the euro was introduced physically in 2002, there was a bit of a difficult learning process. You might not realize just how important a piece of mental furniture your anchor scale of monetary values is. It takes time to change it, but certainly 8 years down the road I now think in euros and have forgotten what the Belgian franc I was previously used to was worth.

The introduction of the euro, by the way, thanks to very careful preparation was incredibly successful with hardly any hitches in what was a monumental operation of physically introducing a new currency and withdrawing an old one.

Let me say a few words about the physical euro. The banknotes in their different sizes and colours are a whole lot prettier and more practical than dollars. The strange thing about the notes is the 500 euro which the Germans insisted on having to replace their 1000 DM. You never see them and no normal shop accepts them. Their only conceivable use is for large cash illegal transactions. It’s slightly odd that the EU elsewhere engaged in fighting money-laundering should have sanctioned them.
There was at the time a long debate about where the coin/note boudary should be. People belly-ached about 2 euros being worth a fair bit while seeming loose change. I think in the long run it was right to start the notes at 5. In the US despite a number of attempts they have not managed to replace the 1 dollar bill with coins; that strikes me as daft in the rich States, but I guess handy in dollarized economies like Cambodia. Notes used too frequently wear out quickly and have to be replaced more often than coins.

There are of course too many small euro cent coins, the 1c and 2c are a nuisance. They had to be introduced in order to allow exact conversion to two decimal places, but everything has long since been rounded up. The Finns thought they could get away without them, but they discovered that the first minted ones in the starter kits of small change had become expensive collector items, so they flooded the market with more. The coins coming in 16 different national sides are emminently collectable and it’s quite amusing to go through your pocket, turning over the coins from their common face to the national one to discover just how far they have travelled. The euro is nice to handle.

When the euro was introduced a lot of small ticket items you buy frequently like cups of coffee were rounded up quite considerably giving many the impression that the euro had provoked rapid inflation. However, big ticket items purchased less often didn’t change and even came down in price with the advent of easier cross-border price comparison provoking competition. Generally inflation in the euro area has been on the low side, though the subject of inflation differentials between euro members exercises macro-economists considerably. Again, different US states have different rates of inflation.

Macro-economists also worry about the “one size fits all” interest rate set by the European Central Bank. On the whole it’s probably done more good than bad as the large critical mass of the euro area which for a long time was free from speculative attack, unlike the previous currencies it succeeded, has allowed the interest rate to be relatively low facilitating more investment in many member economies.
Without the levers of exchange rate policy (competitive devaluation) and monetary policy ( changing the nterest rate to help the economy) at their disposal, euro members have to make their adjustments by using fiscal policy (increasing/decreasing government spending, taxation and borrowing) which is why the treaty says it is a matter of common concern and the Stability and Growth Pact is such a big deal. Very few countries have actually been respecting the SGP recently as it seems to have been designed for a crisis free age. Also the sanctions contemplated in it would be pretty counter-productive anyway. Since it’s all about peer pressure and everyone is misbehaving, there’s not much point in getting excited unless a member is way out of line, like Greece.

A final word on the absurdity of the recent debt crisis.

Has it escaped everyone’s attention that the very ratings agencies, Moody’s, Standard and Poor’s and co., who have been down-grading sovereign debt are the same people who triggered the financial crisis in the first place by giving triple A ratings to repackaged sub-prime mortgages ? Because of their worthless advice to greedy banks we found ourselves in a mega-financial crisis and had to bail out the banks with trillions of tax-payers’ money. And guess what, that now means countries are heavily in debt. So this seems like a good time for “the markets” whoever they are, but probably ultimately the speculative divisions of the same banks we bailed out, to be gunning for countries with large debts some of which are in the euro. So our currency goes down and taxpayers lose more money as the value of their savings goes down.

Why do we put up with this obscene nonsense ?

The term global governance is at present rather empty but we need it badly to protect the real economy that makes things and the people that work in it, spend and save, from the marauding parasitical might of big international finance, who are a law unto themselves and for whom it is again sadly “business as usual”.
Nothing has been learned, nothing has been done, only vast amounts of taxpayers’ money have been poured down a black hole (and presumably into a few fat cats’ pockets), while we have got ourselves heavily into debt for which apparently we are now to be punished by the same people we bailed out. Surely this has to stop.

In the meantime, don’t panic. The euro is going to stay and we will happily keep on spending it.