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The Euro

The Euro is now the official currency throughout much of Europe. Monetary unification reflects the increasing political interdependence of of the European Union.

Examine a fistful of Euro coins. The first thing you'll notice is that it's hard to tell them apart. The 20 cent piece is remarkably close in size to the one euro coin. In bad light, it's difficult to distinguish the two.

The one cent coin is incredibly teensy - comparable to a mosquito and just as annoying. And the European Union breached its own directives by making two of its coins extremely high in nickel content. Nickel is a metal to which 20 percent of the populace has an allergy.

You're holding in your palm the essence of the European Project. Compromise rules and the result is frequently bland. But, at base, it's all about the money.

The bills, in contrast to the homogenous coins, are ingenious. You need to examine the paper money with a magnifying glass to appreciate the micro-writing and laser strips and watermarks and silk threads and all manner of devices to give counterfeiters nightmares.

One other thing. Officially, the plural of Euro is... Euro. This is one EU directive that the Irish will no doubt ignore(s).

A Political Currency

The whole premise of the Euro is unique in the modern world. Normally, a new currency is created after some sort of political unification. But, the Euro's key purpose is to promote political unification. With everyone using the same money, political harmony will follow. Yes, trade within the Euro zone will be easier without having to deal with exchange rates and bank fees. But, the Euro is above all else a political statement rather than simply a medium of exchange.

With the switchover to the Euro for everyday business, the point was driven home to hundreds of millions of European citizens. Hey, this European business is really serious. It's not just about grabbing subsidies and watching political bigwigs parade in front of the cameras.

The obvious fact is this. Who controls the money controls everything.

An Economic Currency

So, how effective is the Euro in its secondary role as a real live currency?

It has definitely made trade within the Euro zone easier and it does indeed promote economic harmonization. It is immediately obvious to travelers that Big Macs in Ireland cost the same as they do in Germany. For the first time we can easily tell that the Irish pay lots more for milk than anyone else.

But, will knowing such facts actually result in harmonized prices? Any Irish person I know who has vacationed anywhere else in Europe has been astounded by how much cheaper things are in general. But this knowledge didn't seem to matter a whit when it came to reducing Irish prices. It took the Great Recession to accomplish that.

The Key Problem

What happens when economies of the member states don't converge? The lesson of Ireland is instructive. Ireland had one of the fastest growing economy on the planet. Inflation rose to 7% at one point. House prices rose inexorably.

What was needed, the money gurus told us, was tight money - higher interest rates to dampen spending. But, what the Irish naysayers wanted was not to be. Instead, in an overheated housing market, cheap money was easily available and house prices continued to rise. There wasn't any damping of demand from a rise in mortgage rates. The result of handing over control of the money decisions to the European Central Bank was that Ireland went through a period of inflation and normal monetary restraints weren't available to policy makers.

The lesson? The needs of tiny Ireland pale against those of the rest of the European Union.

In short, the needs of the many outweigh those of the few. Which sounds very much like a definition of democratic government. The lesson again is that the euro is bringing all of us into a unified whole and nation states in Euroland have lost some key powers.

National Monetary Policy

The only damper left to national governments who are out of sync with Germany and France is careful control of bank lending. This can be accomplished by demanding high levels of reserves. For every Euro lent, keep one in the vault.

Unfortunately, Ireland's political masters insisted on low reserves and encouraged untrammeled lending. The result, which was predicted by independent economists for years, was a bubble.

Well, that bubble has burst with enough force to shatter the Irish economy.

The Euro as Insurance

The Irish financial system is a basket case. One bank has been nationalised and the rest are treading water. Actually, they are bankrupt but they've not been forced to value their loans at realistic prices. By such deceptions are they kept afloat. That, and the commitment of the government to take the crap off their hands and lumber the Irish people with it.

If we weren't part of the Euro, Ireland's currency would deflate rapidly. In a few rough months, prices would adjust across the economy and Ireland would be competitive again.

But, because the European Central Bank stands as the country's ultimate guarantor, we're stuck in limbo. Gradually prices are dropping. Doctors and lawyers are still raising theirs.

This is good for those with savings, which otherwise would be wiped out. Is it bad for the economy as we swing slowly, slowly in the breeze?

Regrettably, we shall see.

Wither The Euro - 2010?

Blame it on the PIGS.

Portugal - Ireland - Greece - Spain: they're the guilty parties behind the Euro's rapid decline.

Living high on the hog we were. With the spare euro jangling in our pockets, we'd fly to Florida or Dubai and buy, well, anything.

Gone be the days. And trophy houses. And the patience of Our Angela of Mercy, Mother Merkel of Germany. Even gift giving Saint Nicolas Sarkozy is apprehensive.

The Euro, it should be remembered, is a cobbled together political currency, an attempt to bind closer the disparate states of Europe. Like any currency it’s a statement of sovereignty. Now that the PIGS have overturned the trough, just how solid is the the European experiment and its monetary union?

China and the United States, the hard men of super-politics, have let it be known they don’t’ think much of Europe. They  impatiently muscled EU negotiators aside during the recent Copenhagen Global Warming conflabulation. And the EU’s own citizens - France, Netherlands, Ireland - all rejected a constitution designed to strengthen EU institutions.

But, listen to the naysayers. They preface their rejections by agreeing the central point – a united  Europe is essential.

Recent events have proved to everyone that the continent's banks and financial centres are totally entwined. Transportation and electric systems, pipelines, roads and broadband wires, the physical backbone of our modern economies, are essentially inseparable. The supra-border movement and outlook of the EU’s citizens has grown.

And just look what happens when the big bad wolf starts huffing and puffing. Ireland passes the Lisbon Treaty – that European Constitution by another name - after first rejecting it. Greece kowtows to the European bankers. When the wolf is at the door, we piggies scurry to the strongest house around.

My bet is that the Union can't be unravelled and that includes the Euro. I expect the current crisis to be resolved and this currency to survive. But, that doesn't preclude a fall in the Euro's value to more rational levels. The currency has been severely overvalued. My own experience is that once these currency swings start, they keep going for a while and that the pendulum always swings further than it should.

If all this talk about money has you yawning, then I’m sorry to boar you.

Britain

Britain opted out of the first round of monetary union. The UK gambled that it could stand apart from all its continental allies and trading partners and rely on the Channel to keep Europe at bay. Successive Irish governments have reaffirmed again and yet again that Ireland is a member of the Euro zone and hang the consequences of a split with its closest neighbour and largest trading partner - Great Britain.

Until the Great Recession, Britain seemed to be doing fine going its own way. But, oops, even with control of its own currency, the UK property market zoomed, easy lending resulted in hundreds of billions in bad loans and things are looking grim for the Pound Sterling.

Despite this, opposition to the Euro remains strong in the UK. A referendum is required to scrap Sterling and take up the Euro and poll after poll shows low support for such a switch. So, expect the current situation to continue for the forseeable future - or until the British economy swirls down the toilet hole.

Euro Versus Dollar

I hesitate to bet against the US in the long run. But, a combination of huge budget deficits and a huge trade imbalance has weakened the mighty currency. Add in a seeming unwillingness to wean itself from oil, the insatiably risky greed of the money men, the stubborn unemployment problem, two wars at once....

Still, when the Greek bankruptcy crisis reached full pitch, investors ran to the almighty dollar in whose God they trust.

Lurking in the background is that other potential problem. The Chinese and the Opec oil nations have lost trillions by always investing in dollars. If the oil barons start denominating the black stuff in a mixed basket of currencies, all bets are off.

Luckily for the USA, they all own so many of those dollars, the monied nations can't afford to rock the boat too badly. Yet.

Perhaps we had all better practice the proper pronunciation of Renminbi, the Chinese currency. And remember, 1 Yuan equals 10 Jiao or 100 Fen.

Exchange Rates Converter

You can follow exchange rate values at XE's must-use currency converter.

The Swami Speaks

It's a big decision when you convert your dollars or pesos or yen to euro. How do you know when to make the conversion?

My own personal experience is that once a currency swing gets going, it takes months and months for it to work itself out. We'll all know when the pendulum is at the bottom of its curve by the fact that rates get fairly stable for a couple of months.

This isn't an economist speaking - just someone who's been watching these swings back and forth with intense interest for the past 35 years.

One strategy to lessen the risk is to convert only a portion of your funds and leave a bundle behind. But, no matter how you act, it's a risk. Read the business section of the papers, consult your Ouija board and leap. For more on bringing money in and out of Ireland, click here.

 


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