The coming of the Euro has triggered varying degrees of concern in the EU countries which participate in its introduction at the beginning of 2002. Citizens' attitudes vary from positive interest to puzzlement, sometimes hostility. In this article, James Robertson examines some problems which have not received the attention they deserve. He analyses the problems which the use of a single currency will have to tackle on various levels of economic activity — local, national and supranational.

The Euro will prompt further monetary reform

By James Robertson

The introduction of the euro, accompanied by the withdrawal of existing national currencies, in January and February next year was bound to throw up problems. Already forgers are said to be actively at work in the Netherlands and Ireland on the new high-denomination euro notes; the mounting urgency to get rid of "black" pesetas is leading to a property boom in Spain; commercial and bureaucratic euro rip-offs are forecast in Greece; and a cash shortage is creating havoc in French shops, with the Bank of France now manufacturing euro notes and coins instead of francs, while increasing numbers of consumers are getting rid of hoarded francs and having to pay with credit cards for items like cups of coffee. Finland, Germany, Belgium, Portugal, Italy and Austria are all said to be experiencing various glitches. The only state in which conversion is likely to go without one is Luxembourg.[1]

It is inevitable that a change of such magnitude across twelve different countries should involve teething troubles of that kind. In normal times they might be expected to last a few months, at most a year or two. But times are not normal. The threat of world recession, the aftermath of the recent terrorist atrocities in New York and Washington, and the rising worldwide opposition to everything seen as undemocratic corporate globalisation, are not an auspicious setting for the new currency’s birth.

While those who benefit conspicuously from the coming changes will be people who are already economically and politically privileged, many others will have their lives disrupted. People in the Eurozone will tend to blame the euro as an unwelcome aspect of globalisation.  Its consequences were not widely understood before it was introduced. As they become clear, Europe’s leaders — in government, business, finance, trades unions and the professions — should be prepared for the reaction.

This article briefly discusses three of the issues that may come up.



Why did the common European currency have to be a single currency?

A single currency is only one kind of common currency. Because the euro is being introduced as a single currency, the peoples of the Eurozone will be compelled to use it. Their national currencies will have been scrapped.

A common European currency might have been introduced in parallel with existing national currencies. That kind of euro would have provided a choice. It would have enabled people to choose to use the currency that best suited their different types of monetary transactions. People and businesses in the Eurozone could have used the euro for European travel and trade outside their own countries, while continuing to use their own currencies for most domestic transactions. Over the years they might have found it convenient to use the euro for more and more domestic transactions. The euro could then have evolved painlessly towards a single currency — by choice, not compulsion.

As things are, it is ironical that citizens of the Eurozone will be compelled to use the euro, whereas citizens of Britain, Denmark and Sweden will be free to use it when they want, as a common currency for foreign travel and trading in Europe. In my view they should keep their own currencies, at least for a few years longer. They will then be in a comparable position to the many non-Americans who use the US dollar as a common currency for travel and trade outside the USA. Branches of British retail stores like Harrods and Marks and Spencers are already preparing to accept euro notes and coins from returning British holiday-makers and business people, as well as visitors from abroad, at stations, airports, ports and other tourist centres. And in every country, computerisation now makes it easy for individuals and businesses to use different bank accounts for handling payments in different currencies. 

Meanwhile, as Eurozone citizens become increasingly aware of this, and of other disadvantages of their new single currency, they may ask why Europe’s political leaders failed:

Was it perhaps because they hoped to push their people unaware and unsuspecting into a centralised European super-state?



Do the advantages of the single-currency euro really outweigh its disadvantages?

Advantages claimed for the single currency are that it will:

However, those results could have been largely achieved by a common currency. As it is, many regular users of euros and sterling (or Danish or Swedish kronor) will be able to limit their exchange costs and risks by keeping separate bank accounts for each currency.

As time passes a serious disadvantage of the single currency is likely to become clear. Eurozone countries will continue to have different levels of prosperity, and their economic cycles will often be out of step — with some at risk of inflation and others at risk of recession.  So uniform interest rates imposed by a single European monetary authority will be too high for those that need the stimulus of low interest rates, and too low for those that need the restraint of high ones as Ireland has recently done. 

The distinguished American economist Jane Jacobs pointed out that compelling everyone to use a single currency is in line with the powerful impulse to centralise economic power and decision making: "Today we take it for granted that the elimination of multitudinous currencies in favor of fewer national or imperial currencies represents economic progress and promotes the stability of economic life. But this conventional belief is still worth questioning...  National or imperial currencies give faulty or destructive feedback to city economies and this in turn leads to profound structural flaws in those economies, some of which cannot be overcome, however hard we try".  [3]

In Britain in recent years there have often been complaints that national monetary policy tailored to high levels of economic activity in the South was damaging the already depressed economies of Tyneside, Merseyside and other parts of the North. This weakness of a single currency at the national level affects a supranational one with even greater force. And not only urban local economies suffer. Rural local economies have the same problem. When local economies, urban or rural, have to depend on national (or supranational) currencies as the medium of exchange to facilitate economic activity within their own local boundaries, declining local ability to compete in the national and international economy results in too little money coming into local circulation even to support entirely local transactions. Local unemployment then rises, local land and other physical assets lie unused, and local needs remain unmet — all for want of enough money circulating locally to facilitate local exchange. The monetary policies appropriate for a national (or continental) economy at any particular time are bound to be inappropriate for many of the local economies within it. More flexibility is needed. 

The European Commission recognises that a single monetary policy for the Eurozone will widen the gap between rich and poor areas and worsen the problems of “economic crisis regions”. It aims to correct this by financial transfers to those regions — confirming that a single currency must necessarily involve higher levels of centralised public expenditure and taxation, and thus a centralisation of economic and political power.

That points to one reason why, for the time being, the Eurozone will have problems with a single currency which the USA does not.  Being more unified politically, economically, socially and culturally, the USA can respond more flexibly to internal economic divergencies and fluctuations. Not only is there greater mobility of labour there than between EU countries, but public spending and taxation is much more centralised. The federal government’s budget is roughly twice the total of all the US states’. So, as economic prosperity rises and falls in different states, their federal taxes and spending automatically fall and rise to even things out. By contrast, the EU’s present spending and taxing is only a small fraction of its member nations’. It will not be able to provide that automatic stabilising mechanism unless it develops much further towards a single state. And, unless it does develop that way, economic divergencies between Eurozone member nations that can no longer be dealt with by exchange rate adjustments may provoke divisive political crises.

Turning, then, to the political aspects of a single-currency euro, in past years many of its supporters saw it as a necessary step toward a United States of Europe, which would put an end to war between Europe’s peoples and be strong enough to stand up to the USA and the former Soviet Union. The urgency of that argument is no longer as great as it was, and opinion surveys suggest that many people in the EU feel that, as citizens of democratic states, they should retain controls over their national affairs. This is why leading euro supporters in Britain now claim that its political and constitutional significance is small, and that it is not necessarily a step towards a single state. The case they now put forward for joining the euro and giving up the pound is primarily economic. Nonetheless, the present political divide on the euro is essentially between those who want a more centralised European Union and those who do not.

 

What can be done to remedy the euro’s democratic deficit?

This is the last, but not the least, of the three questions.

As the anti-globalisation movement continues to gather strength, the undemocratic features of the euro will attract increasing attention. Not only will some Eurozone countries inevitably suffer from its monetary policies. The institutional  basis of the euro puts monetary policy outside democratic control; the European Central Bank’s objectives and targets are not decided by elected governments but by itself; and its operations are not subject to political control.

One foreseeable response will be to emphasise the importance of local economies. For some years local currencies, like LETS (local exchange trading systems), have been springing up in many countries around the world to stimulate local economic and social activities in depressed areas. 

This points towards the possible future evolution of a system of co-existing currencies at different levels — supra-national (including global, in due course), national, and local. As a feature of world economic development over the coming decades, this will be in tune with the increasingly global and increasingly local character of 21st-century life. It will reflect a preference for an organic rather than a mechanistic, one-size-fits-all approach to monetary progress. It is a prospect that will help to shape future thinking about monetary development and democratisation in the Eurozone. The European Commission is already encouraging local currencies in the EU in order to moderate some of the damaging local impacts expected from the euro.

Rising concern about the undemocratic aspects of the monetary system based on the euro will prompt increasing interest in other reform proposals too. For example, at  present commercial banks in all countries are allowed to create — out of thin air — by far the greater part of the money supply and put it into circulation as profit-making loans to their customers. If it were created by the central bank as central monetary authority and spent into circulation by governments, it would provide a significant new source of public revenue. This is estimated at over £40bn a year for British taxpayers, and over €160bn a year for distribution to Eurozone governments. A powerful democratic case can be made for treating this public resource as a source of public revenue rather than private profit. We will all hear more of it. [4]  

20 September 2001

 

 [1] For example in the Independent on Sunday, 26 August 2001.

[2] Jane Jacobs: Cities and the Wealth of Nations, Penguin Books, 1986, p.158

[3] Joseph Huber and James Robertson: Creating New Money: A Monetary Reform for the Information Age, New Economics Foundation, London, 2000.

James Robertson works as an independent writer and lecturer.  His latest publications include: The Transformation of Economic Life (Green Books, Dartington, 1998), and Creating New Money: A Monetary Reform for the Information Age (co-author)(New Economics Foundation, London, 2000).

James Robertson
The Old Bakehouse, Cholsey
Oxon OX10 9NU, UK
Tel:  +44 (0)1491 652346
Fax:  +44 (0)1491 651804
email: robertson@tp2000.demon.co.uk
web: www.ecoplan.org/tp2000

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