Subject:
The Euro
Date:
Sat, 30 Jun 2001 06:59:51 -0400
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"R. A. Hettinga" <[EMAIL PROTECTED]>
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http://www.townhall.com/columnists/brucebartlett/printbb20010630.shtml
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Bruce Bartlett (back to story)
June 30, 2001
The Euro
Almost everyone who ever visited Europe has probably come back with the
odd
pound, franc, lira or mark that they never got around to exchanging for
dollars. They should hold on to them, because they are going to become
collector's items.
In a few months, they will cease to exist. All members of the European
Union are withdrawing their individual currencies and coins from
circulation, and replacing them with something called the "euro." If the
United States wishes to keep the dollar dominant in international
commerce
and finance, it needs to respond to this challenge.
The euro has actually been around for a couple of years. It was formally
introduced on January 1, 1999, but since has been available only for
bank
transactions. People can hold euros in bank accounts but still must use
national currencies for cash transactions. However, national currencies
are
now linked to the euro, so that exchange rates are largely fixed. This
has
led to a convergence of inflation and interest rates throughout the EU,
exactly as economic theory predicted.
To the dismay of Europeans, however, the euro has not become as popular
outside Europe as expected. They thought the euro would quickly
challenge
the supremacy of the dollar as the currency of choice in international
commerce and finance. But although the euro was initially valued at
$1.19,
it has fallen fairly steadily to a current value of just 86 cents.
Europeans hope that withdrawal of national currencies and replacement
with
euro notes and coins will revive interest in the euro. They have even
taken
steps to give euros an advantage over dollars, by printing large
quantities
of 1,000 and 500 euro notes -- much bigger than the largest U.S.
currency
in circulation. The largest dollar note available is the $100 bill.
Although $500, $1,000 and larger bills exist, none have been printed
since
1946, and since 1969 the Treasury Department has withdrawn them from
circulation.
The problem is that there has been a lot of price inflation since 1946.
A
$100 bill today will only buy what $11 bought then. That is a key reason
why U.S. currency per capita has risen from $179 in 1950 to $2,146
today.
But because the Treasury adamantly refuses to supply the demand for
larger
bills, people have little choice but to hold more and more of their cash
in
the form of $100's. Such bills now account for 67 percent of all U.S.
currency outstanding, twice the percentage as recently as 1979.
Another reason for the growing use of $100 bills, of course, is the
underground economy, both here and abroad. This includes not only
criminal
activity, such as drug dealing, but much ordinary commerce that people
simply wish to avoid reporting to tax collectors. Because taxes are so
much
higher in Europe, the underground economy there is about 50 percent
larger
than here. Estimates by economist Friedrich Schneider of Linz University
in
Austria put the underground economy at about 16 percent of the gross
domestic product in Europe in 1994. It ranged from a low of 13.1 percent
in
Germany to a high of 25.8 percent in Italy. His U.S. estimate is 9.4
percent -- in line with previous calculations.
Kenneth Rogoff, recently named chief economist at the International
Monetary Fund, believes that the EU's decision to issue notes larger
than
$100 is a de facto effort to gain "market share" in the underground
economy. Historically, dollars have been the preferred medium of
exchange
in this area, which explains why the U.S. "exported" more than $22
billion
of currency in 1999. This helped finance much of the U.S. current
account
deficit.
Of course, much underground economic activity in Europe takes place in
local currencies. But with their elimination, those with large stashes
of
cash have to do something with it before the end of the year. It would
appear too suspicious to law enforcement officials if they tried to
exchange large quantities of unexplained cash for euros next year. The
result has been a spending boom throughout Europe, as people rush to buy
tangible assets with their underground cash.
In Spain, this has led to a real-estate boom that has driven housing
prices
up by 27 percent in the last 2 years. In The Netherlands, the unexpected
repatriation of underground cash from abroad has caused the guilder to
fall
by 7.9 percent.
Economists generally applaud introduction of the euro, believing it will
facilitate commerce and growth throughout Europe. It would help the
dollar
compete if the Treasury once again issued $500 bills. After all, they
will
only buy $56 worth of goods compared to when they were last printed. It
would also help continue to make the dollar the world's most desired
medium
of exchange, from which all Americans benefit.
©2001 Creators Syndicate, Inc.
townhall.com
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"... however it may deserve respect for its usefulness and antiquity,
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