Since its conception in the first few moments of 1999, the value of the European Central Bank's (ECB) fledgling currency, the euro, has declined steadily in terms of the U.S. dollar and in terms of the currencies of other major nations. Introduced at a respectable 1.20 to the dollar, the euro has since had a pretty bad run, and last Thursday's closing rate of 0.8252 to the dollar marks a new low.
At its dawn, there was much optimism and hope surrounding the currency. Many believed it would unite the same countries whose rivalries had generations earlier instigated world wars. Now, however, with its lack of strength, many investors and economists are wondering whether the currency will work at all. While some proponents continue to uphold the euro as a stable medium of exchange, I, for one, see this new currency for what it really is: a bunch of eurotrash.
Well, perhaps I'm not being entirely fair. There are, of course, benefits to the consolidation of currencies. With the advent of a unifying currency, the transaction costs of converting between multiple forms of money are reduced to zero.
As a tourist in Europe, one could see the benefits firsthand. Taking a night-train from Paris to Munich no longer causes worry about exchanging francs into deutsche marks. On a larger scale, transactions become more efficient and less costly as banks, bond issuers and investors alike no longer have to worry about exchange rates.
However, this seems to be the only benefit, and it does not outweigh the multitude of costs incurred when setting up an international currency and centrally regulating it in an effective manner. The biggest problem with the euro, a problem that must have been overlooked when it was created, is the fact that using monetary policy to rectify situations in one country will have profound impacts on the developments in other countries.
Let's say for a moment that Spain's economy is in the tank. Unemployment is soaring. Businesses are not investing. Consumers are hesitant to spend. The ECB would see the impending Spanish recession and would attempt to spur growth by reducing interest rates and increasing the supply of money.
If this happens, both consumers and investors most likely would begin to spend more, as they become less inclined to let their money sit in the bank when the rates of return on that money are reduced. However, in this example, we have looked at shaping monetary policy from just one country's perspective.
What if prices in Germany, another nation under the guidance of the ECB, are soaring out of control? The last thing a central banker would want to do is increase the money supply, as that would exacerbate German inflation.
So what would the ECB do? That's a good question, one that would puzzle and confound
European central bankers for some time.
Unfortunately, because of discrepancies in the economic developments of European Monetary Union members, it will be very difficult for one central bank to regulate all of Europe's money supply. Another difficulty stems from the fact that, politically, the nations of Europe remain divided. It will be some time before Italy, Greece and the other nations decide to unite themselves under one central governing body, and until this happens, the full goals of unity and stability advocated by the EMU will fail to be realized.
Unity in Europe may not come about primarily because both languages and labor laws are drastically different across the continent. Unless you are fluent in a number of languages, securing a job in other countries can be very difficult. As a result, it will not be feasible for citizens of different backgrounds to co-inhabit different countries, and the European Union will remain largely sectional over linguistic differences.
Furthermore, labor markets in some countries are tighter than others, not for economic reasons, but because legalities make them so.
The big example of this is France, where the labor unions have lobbied such that it has become almost impossible to lose one's job. As a result, firms are wary of hiring new workers, and unemployment in France remains relatively high.
If the French themselves are finding it difficult to land a job, don't you think it would be impossible for a German or Swedish worker to immigrate, be forced to speak the language and successfully gain employment?
Some have stated that the only problem with the euro is its timing. With American markets as they have been over the past year or so, few people across the world want to hold euros, because their returns are better when holding dollars.
The problems with the euro transcend difficulties in the business cycle. There are a number of structural problems with the current system set up by the ECB that are insurmountable, even if things start to swing the way of European markets. In the long run, the EMU may work, but it is going to take some dramatic modifications before this eurotrash can be transformed into something feasible.
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