The
Arrival of Euro Banknotes & Coins
(22
January 2002)
Congratulations, Europeans! Why? It
is because the ‘Euro’ banknotes and coins eventually arrived on 1 January 2002
after a 3-year transition period.
Perhaps the Euro is one of the
greatest inventions in human history; so is a risky economic experiment. 12
European Union (EU) countries have decided to give up their own currency and
adopted a common currency. Since 1999 a new institution, the European Central
Bank (ECB), has been setting a single interest rate for the whole Euro area.
Its objective is to maintain price stability across the Euroland. What about
the other 3 EU countries? Denmark and Sweden have decided to stick to their own
currency; Britain has got to meet its own five economic tests and will not hold
a referendum before the middle of 2003.
The general public seems to agree
that it is good to have a single currency because it is convenient. Economists
are still divided about the potential costs and benefits of the single
currency. I am one of the few people in the world who ‘reject’ the idea of the
single currency (although I have advised people to buy the Euro as one of the
long-term investment plans). It is because the costs of the single currency
outweigh its benefits. One of the reasons is that countries are in different
economic conditions. One interest-rate policy may not fit to all countries. For
example, some economists have suggested that a healthy economy like Ireland
should have higher interest rates than the current 3.25%, whereas a shrinking
economy like Germany should have lower rates. No doubt setting a right level of
interest rates is vitally important to control economic activities for any
economy.
The following table shows the major potential costs and benefits of
the single currency from an economic perspective:
|
The Single Currency – The Euro |
|
|
Benefits |
Costs |
|
l
Reduced transaction costs |
l
Loss of an independent monetary policy |
|
l
Reduced exchange rate uncertainty |
l
Loss of an independent exchange-rate policy |
|
l
Increasing intra-Euroland competition |
l
Loss of an independent fiscal policy |
|
l
Encouraging direct investment from the rest
of the world |
l
Lack of convergence |
What do you think? Maybe the Euro
will bring rich benefits in the long run but we certainly have to face
short-term painful adjustments in terms of lower growth and higher
unemployment. As John Maynard Keynes said, “In the long run, we are all dead.”
Anyway, the idea of the single currency is more like a political issue rather
than an economic one.
In 1999, I predicted that some Asian countries would adopt a common currency for some part of the Asia Pacific area in the 21st century. Will this happen? I hope not! Just one more thing: Some people have asked me whether 1 Euro can buy 1 US dollar (currently at US$0.88) by the end of 2002. The chance might be less than 50%.