 ast
Friday, the European Central Bank began distributing euro coins to
the public. The euro has been available for bank transactions and
on foreign exchange markets since early 1999. But local currencies
have continued for cash purchases. Next year, people will need to
use euro notes and coins for goods and services in 12 different countries.
On Jan. 1,
virtually all existing European currencies will start to disappear
for good — no more French francs, Italian lira, or German marks,
among others. By Feb. 28, the euro will be the only currency accepted
at banks, shops and businesses throughout most of Europe, and will
denominate all prices. National currencies unconverted by March
1 will become worthless.
It was originally
thought that the euro would displace, or least challenge, the dollar's
supremacy as the currency of choice in international business. But
that has not happened. The euro has fallen more or less steadily
against the dollar. Initially, one euro was worth $1.19; today,
just $0.89.
The distinguished
monetary economist Anna Schwartz is skeptical that the euro will
ever fulfill its promise. She notes that new currencies normally
are introduced after political union. But in this case, a common
currency is being introduced before the nations of Europe have joined
together into a unified state. Indeed, one of the stated purposes
for replacing national currencies with the euro is precisely to
hasten the move toward political union.
Schwartz is
very dubious about whether this will work. "There is no evidence
that the economic advantage to a holder of conducting transactions
with a currency issued by a country other than his own . . . has
political implications," she writes in The Region, a
publication of the Federal Reserve Bank of Minneapolis. "Why
then should one expect that the use of euros by a German or French
resident would somehow enlarge their sympathies for the other?"
she asks.
Schwartz is
also concerned about the economic implications of the euro. The
euro zone has economic output about equal to that of the United
States. But simply forcing people within it to use a single currency
will not make people elsewhere want to use it in international transactions
if the euro's value is undependable. So far, it has failed to demonstrate
that it can be used as a secure store of value, unit of account,
or medium of exchange, in Schwartz's view. Until it does so, the
dollar will continue to be the world's dominant currency.
This is not
to say that the Europeans are not doing what they can to encourage
worldwide use of the euro. One way they are going about this is
by printing 500-euro notes in order to make large cash transactions
easier. Many critics have accused Europe of, in effect, going after
the drug- and money-laundering business with this action. Since
the largest dollar denomination available is the $100 bill, it is
very bulky for large cash transactions. The equivalent amount of
euros would take up one-fifth the space in a briefcase.
But while the
Europeans may be encouraging illegal transactions in one respect,
the conversion is wreaking havoc on the underground economy in another.
People with hoarded cash, such as those trying to hide income from
tax collectors, must now use it or lose it. If they try to exchange
unusually large quantities of local currency for euros next year,
the tax authorities may ask embarrassing questions about where the
money came from.
To avoid potential
tax problems, many people are spending their undocumented cash as
fast as they can. Cash transactions are up throughout Europe, as
people rush to buy jewelry, paintings, luxury cars, and even houses
with underground cash. Others are trying desperately to get their
cash out of the country and convert it to pounds, dollars, or Swiss
francs.
Criminals are
preparing, too, for the debut of the euro. Because massive amounts
of cash will have to be moved throughout Europe very quickly, opportunities
for theft will increase. Also, because euro notes are not yet well
known to bank tellers and shopkeepers, it will be easier to pass
counterfeit euros. And those holding counterfeit lira, francs, and
marks have only a few more weeks to dispose of them before they
become totally worthless.
In the near
term, the euro conversion is likely to slow growth and inflation
in Europe, as the supply of underground cash dries up. The euro
may temporarily strengthen against the dollar. But whether the euro
ever becomes a serious challenger to the dollar, only time will
tell.
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