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The Common Currency (Euro)

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Notes on Currency

EU

 

 The euro has been adopted by:

Member State  Former currency  Member State Former currency
 Austria  Schilling  Italy  Lira
 Belgium  Belg. franc  Luxembourg  Lux. franc
 Cyprus  Pound  Malta  Lira/pound
 Estonia  Kroon  Netherlands  Gulden/florin
 Finland  Markka  Portugal  Escudo
 France  Fr. Franc  Slovakia  Koruna
 Germany  Deutschemark  Slovenia  Tolar
 Greece  Drachma  Spain  Peseta
 Ireland  Punt    

The government of Sweden agreed to adopt the euro but a referendum in 2003 rejected it.

Denmark has linked the krone to the euro, but the voters refuse to approve its adoption.

Slovakia adopted the euro on 1/1/09.

Non-members have adopted it:

Kosovo
Montenegro

French overseas territories:
Guyane
Martinique
Guadeloupe
Reunion
St Pierre.
Mayotte

Britain seems unlikely to adopt it. There are endless arguments about it, but the politicians clearly believe people would not vote for it in a referendum, after being exposed to propaganda in the right wing press owned by Rupert Murdoch and the Daily Mail (why does Murdoch, an Australian-born American citizen care?). Gordon Brown, in charge of economics since 1997 (and until May 2010 Prime Minister), clearly valued the independent action he had from a pound that is not linked to the euro. Was he right?

The 2008 financial catastrophe seems to have made Britain joining totally impossible. After the fall in the value of the pound against the euro in October 2008 joining might have been more attractive - Brown may have been against joining at too high an exchange rate. But the crisis of Greece and the bankrupt banks makes a change seem far too risky.

New eastern European states are supposed to adopt it, according to the terms of their accession to the EU, but are not making much progress towards doing so, except for Slovenia and Slovakia. Estonia joined 1 January 2011.

Lithuania is planning to join in 2013.
Latvia is planning to join 1 Jamuary 2014.

Iceland
following the financial crisis of 2008 Iceland is considering adopting the euro, even though it is not a member of the EU, because the currency of this very small nation fell by about 50% against the euro, making imports very expensive. In July 2009 a new government persuaded Parliament to vote in favor of negotiations to join the EU.

Advantages
Before the euro was introduced, there were many small currencies and three large ones (DM, French Franc, Italian Lira). Changing from one to another was expensive as each transaction cost something in payment to the bank or bureau de change.

Travellers gain a great deal from not having to change currencies when crossing a frontier. Businesses gain from a single rate of interest throughout the common market area and from easy calculations of prices and profits in the whole area. Buyers gain from easy price comparisons in different countries.

The euro is supported by such a large population that it may be becoming a Reserve Currency, held by others outside Europe, and even used for trading oil (a threat to the dominance of the US Dollar).

Disadvantages
The single rate of interest throughout the area may not, at least initially, be suitable for all countries. For example, it has been said that the German economy suffers from a rate that is too high at present (2006) while Ireland has experienced house price inflation because the rate is too low. The British government clearly regards this as important. The problem here may be that governments have for some time been used to controlling the economy mainly via interest rates. In the euro zone these are set by the European Central Bank (ECB), in Britain by the Bank of England. Both banks are supposed to be independent of political control, like the US Federal Reserve. Possibly other means of control are needed, such as taxation rates - though long term EU policy is supposed to be to harmonise these too.

Could the euro break up?
Certain very rightwing commentators in Britain and the US often express the belief that the euro will not last. During the 2011 crisis there are suggestions that some countries might leave and issue their own national currencies. Italy and Greece are often cited as examples. Italy has usually a higher fiscal deficit than the ECB rules permit, and Greece was admitted to the euro-zone, while not fulfilling the conditions. Until recently it seemed very unlikely that either country could actually issue its own currency.

The administrative problems alone would be very difficult, given that frontiers are open. It would be like Pennsylvania opting out of the US dollar.

(There are rumors that at one time Luxembourg was planning to issue a separate currency from the Belgian franc, to which its franc was linked, but it is hard to believe even this relatively small operation could have succeeded.) Until Ireland and Britain joined the EU in 1973 there was a common currency zone so that the Irish pound had the same value as the British pound and circulated freely in notes and coins across the border with Northern Ireland. The two currencies were then separated and started having different values. This was a small change.

Crisis?
In 2009 Greece seems to be in bad trouble with government debt at a very high level. In February 2010 Greece experienced a serious crisis with a very high fiscal debt compared with its GNP. Opponents of the euro cite this condition as a serious weakness. In the absence of a single currency a country in this condition would devalue its currency against the "hard" currencies, such as the Deutschemark or the US dollar. Italy was notorious for doing so. So was Britain, which has just done so again, against the euro in 2008-9. The chief problem may be that unlike in the United States there is no federal budget which can direct euros into deficit states - those with a "trade deficit" with the rest of the country. The EU budget is less than 1% of the total European Union GNP. Therefore there is no automatic currency flow from the rich states, such as Germany or France to the poor ones (Portugal, Italy, Greece, Spain, to use the insulting list made up by currency traders).

In April 2010 Greece has applied to the IMF for a loan. Germany has objected to external aid to Greece without severe cuts in the public sector budget and serious efforts to cure the fiscal deficit. One of these might be to persuade people of the need to pay taxes, as large numbers of the middle class professionals notoriously avoid paying tax.

Spain and Portugal are also in trouble and have seen their government bond rating reduced.

November 2010
Ireland and Greece are experiencing serious difficulties and have had to receive aid from the European Central Bank and the IMF. In May 2011 there are rumours that Greece may leave the euro.

BBC blog

By July 2011 Italy too comes under the question of whether its borrowings can be financed.

By November 2011 The question of Greece has been urgently discussed by meetings of the heads of government of the EU and by the G20 meeting of world economic powers. It remains unclear whether Greece will leave the euro and adopt its own currency. 14 November 2011 A new "non-political" prime minister Mr Papademos has been appointed, essentially by the EU organs. He is a former deputy governor of the ECB. His purpose is to clean up Greece's economy. Can anyone make Greeks pay their taxes and stop bribing officials? A former European Commissioner Mr Mario Monti has taken over as "non-political" PM of Italy.

By the end of November 2011 a discussion of "fiscal union" has been aired. This would require the members of the eurozone to harmonise their taxes, which would be set not by national governments but by the EU Council of Ministers (or rather by the Eurozone council).


Greece
The most likely country to leave the eurozone. The European institutions have insisted on such serious conditions that in the May 2012 election people voted for parties that would reject the conditions. Possibly a near future government may declare national bankruptcy and issue its own currency. Leaving the euro

The election in May 2012 resulted in no party having a majority, and no coalition government could be arranged. Another election was held in June 2013. The result was ambiguous. It is said that the parties in favor of the austerity measures "won", though the the anti-austerity parties could dominate if they cooperated together. A pro-austerity government was formed. If the anti-austerity parties had won, default and exit from the euro-zone seemed likely.

Other currencies have broken up. In colonial times the East African Colonies: Kenya, Uganda, Tanganyika and Zanzibar, British Somaliland and South Arabia shared the East African shilling, managed by a Currency Board (which kept its reserves in pounds sterling and issued currency only according to the pounds in the reserve). These states issued their own currencies after independence, most of which rapidly inflated. They would probably have been better advised to retain a common currency, like the former French colonies in Africa which share the CFA Franc. In 2015 the common East African Shilling may be restored but the people working on it come from the European Central Bank. The proposed date for introduction keeps being postponed. Can they avoid in East Africa the problems of the eurozone?

Any country leaving the euro-zone would experience far more difficulties, and might well have to leave the EU entirely. Of course certain rightwing politicians and businessmen apparently would like to see the EU itself break up. It is not clear what motivates them. Perhaps they ought to go to the first world war sites and graveyards. See the museum at Compiegne. It is to be hoped that the period of Europeans fighting each other has ended.

Some useful sites:
European Commission;
Financial Times.

Historical note
Before the first world war the currencies of many of the European states were linked via a fixed relation to gold in the Latin Monetary Union. Thus the Swiss, Belgian and French francs were all of the same value, as were the Italian Lira and several others, including Venezuela. It was the first world war that led to the break up of this system. To some extent therefore the euro is a recreation of that condition. But it is not based on gold or silver and so is just as arbitrary as other currencies, depending for its value on the discipline of the ECB - which has recently been urged by (non-German) politicians to practice "Quantitative Easing", the latest euphemism for letting the printing presses roll, with an inevitable inflation to follow. The ECB has refused to do so.

Other common currencies

Interesting Reading


Understanding the Euro: The Clear and Concise Guide to the New Trans-European Currency



David Marsh - The Euro

The Euro: The Battle for the New Global Currency * New Edition *

The Euro: The Battle for the New Global Currency

Der Euro: Die geheime Geschichte der neuen Weltwährung


Michael Lewis - Boomerang


Boomerang: The Meltdown Tour


Boomerang: Travels in the New Third World

David Graeber - Debt, the first 5000 year


Debt:the first 5000 years


History of debt


Schulden: Die ersten 5000 Jahre

A history of money from the time of the Sumerians, and the need to cancel all debts every so often.


See currency.

Last revision 28/06/12


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