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Happy Birthday Dear Euro [Update]

by Frank Schnittger Fri Dec 19th, 2008 at 03:25:42 AM EST

Now available in orange

The Euro celebrates its 10th. Birthday on 1st. January.  The exchange rates between the eleven founding European national currencies were fixed from 1st. January 1999 when the Euro began to circulate in the form of traveller's cheques, electronic transfers, and banking transactions.  The physical banknotes and coins appeared three years later in January 2002. Since then a further five European national currencies have merged into the Euro and another 11 may do so in due course. The major exception is the UK Pound (Sterling). With the Euro Sterling Exchange rate now approaching parity, there is renewed debate about whether the United Kingdom, too, should join.

The Euro depreciated rapidly following its introduction (at 71p Sterling) down to a low of 57p Sterling in May 2000 reflecting widespread scepticism (in the Anglo world) that a single currency covering many diverse economies could be stable. It was worth 77p Sterling as recently as mid-October. Today (18th. Dec.) it soared over 95p Sterling (up from 89p since my first Countdown to €/£ parity diary on 12th. December). Against the dollar, the Euro fell from an introductory value of €1 = $1.18 in Jan-1999 to $0.82 in 2000 and then rose to €1 = $1.57 in Jul-2008, and $1.46 now.

front-paged by afew


The success of a currency cannot, of course, be measured entirely in terms of its exchange rates. Just as important is its stability over time, its credibility in international markets, and the volume of transactions conducted in it. The Eurozone has recently drawn level with the USA as the World's largest economy (hat tip to DoDo) and may well become by far the largest when up to another 12 potential members join. It may also become the world's dominant reserve currency if the US $ continues to be as unstable as it has become in recent years.

The Euro has been an almost unalloyed success from the point of view of a small member state such as Ireland.  Irish inflation peaked at 24% in the mid 1970's and early 1980s and I well recall paying 18% interest on my mortgage. This was largely caused by periodic oil and Sterling crises, although it has to be said that high inflationary expectations had also become embedded in the Irish economy and consumer psyche.

Ireland broke the link with Sterling to join the ERM in 1979 ((PDF Alert) at a time when the UK represented 50% of Irish imports and exports and gradually managed to reduce its inflation rates to something closer to the German model - though not without two devaluation crises in 1986 and 1993, which forced the Irish central bank to increase (PDF Alert) overnight interest rates to 100% in order to try to protect the value of the Irish Pound within the ERM.  It became obvious that smaller currencies were always going to be extremely vulnerable to speculative international monetary flows way beyond what any small economy or Central Bank could resist.  Even one Month interbank rates peaked at 60% and it was clear huge economic damage would ensue if such crises were to recur on a regular basis.

The subsequent currency stability and much reduced interest rates enabled by the ERM and then the Euro was one of the major factors behind the rise of the Celtic Tiger.  The one major downside has been that Eurozone interest rates have been far too low for a rapidly growing Irish economy which entered the "bubble phase" of higher consumer price inflation and huge land, house and asset price inflation in recent years.  Irish governments didn't understand that a much more restrictive fiscal policy was required once the traditional remedies of devaluation and domestically controlled interest rates were no long available to policy makers.

Once the bubble burst big time, the ECB was also very slow to recognise the changed realities and actually increased interest rates as recently as last August. So the major downside of the Euro for a small peripheral economy is the fact that interest rate and monetary policies are always going to be set by the major players - Germany and France - in their own interest - rather than taking the needs of smaller peripheral economies into account.

Ireland is now being hit by a triple whammy of a Global financial crisis, a domestic asset price crash, and a major revaluation vis a vis our major trading partner and close neighbour in Britain and Northern Ireland.  Irish Goods and services are becoming grossly uncompetitive and losing market share and sales to Northern Ireland and internet vendors. This has resulted in a major depression with GNP falling by 5% in the year to October 2008, and retail sales falling by 7%. So the rapidly revaluing Euro really isn't a good thing as far as the Irish economy is concerned, and we would much prefer a lower Euro and lower Eurozone interest rates to try an reflate the Irish economy, asset prices and consumer confidence.

Longer term, however, there is no doubt that the Euro has been a good thing as far as the Irish economy is concerned, and although we face a much more difficult period of adjustment now, there are no calls for a return to the Irish Pound or to a link with sterling.  Ultimately,  we would much prefer if Sterling joined the Eurozone as well - even at parity - because then, even if there was a huge loss of competitiveness in the short term, at least we wouldn't be facing 20% swings in exchange rates with our largest market and with all the uncertainty that this entails.

A little more sensitivity by the ECB towards the needs of its more peripheral members would also be much appreciated - especially as the Euro grows to embrace many more small members states - but I hardly expect this to happen.  With the prize of becoming the dominant global reserve currency in its sights, the Mandarins of the ECB are hardly going to give the travails of minor peripheral economies like Ireland a second thought.

I will leave an analysis of the pros and cons of becoming the dominant Global reserve currency to the bankers and economists amongst us.  Obviously it can be a source of considerable pride and reinforce the positive image of the Euro and the EU as a success.  However, as we all know, pride comes before a fall, and perhaps the hubris which accompanied the Celtic Tiger can also act as a cautionary tale for the Eurozone should the Euro become too successful, too quickly.

The inappropriately high Euro exchange which could accompany the Euro becoming the dominant Global reserve currency could also result in a prolonged long term decline of the non-financial elements of EU economies.  We rely on our central bankers to ensure that monetary policies reflect real conditions on the ground in the real economy, and not some new Euro centred financial bubble in the future.

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Your last paragraph sums up the reason I feel inadequate for the UK to enter the eurozone: while the main financial center "on the continent" is still in London, I feel that the (mainly) industrial interests of France and Germany will prevail; And this I consider a good thing, because a bit more long term than finance.

Regarding the smaller countries influence, I feel that it is more a result of having a (relatively) low GDP rather than a political will to shun them. Problem is, the major  actors on the industrial front are France and Germany.

A free fox in a free henhouse!

by Xavier in Paris on Wed Dec 17th, 2008 at 02:56:36 PM EST
I have no doubt that Germany/France will insist that policy making remains rooted in Frankfurt should they allow the UK to join - and they will probably insist on Stability and Growth Pact time constraints on UK fiscal policy as well.

As far as the smaller members are concerned, it is "one Euro, one vote" and so GDP sizes to impact on influence. However my point is that peripheral economies on the fringe of the Eurozone who do much of their trading in non-Eurozone currencies are much more exposed to Euro currency realignments than more central economies who do almost all of their trading in Euros in any case.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Dec 17th, 2008 at 03:25:06 PM EST
[ Parent ]
The Eurozone is the World's second largest economy and may well become the largest when up to another 12 potential members join.

Or if the dollar tumbles again.

Euro area and EU27 GDP down by 0.2%

GDP AND EXPENDITURE COMPONENTS
THIRD QUARTER 2008 - IN MILLIONS OF EURO - SEASONALLY ADJUSTED - AT CURRENT PRICES
GDP
EA152 311 998.7
EU273 149 433.7
US2 395 431.9
JP784 113.7


*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Dec 17th, 2008 at 07:26:04 PM EST
Thanks.  I couldn't find that recent a source.  The gap was much bigger a couple of years ago, so the $ devaluation has already had a big effect. For all intents and purposes, the Euro area and the US are now effectively tied for first place.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Dec 17th, 2008 at 07:36:14 PM EST
[ Parent ]
The gap was much bigger a couple of years ago, so the $ devaluation has already had a big effect.

Years? You're waaay out-dated :-) For, actually, we are talking about the second time the Eurozone could overtake the US.

Weak dollar costs U.S. economy its No. 1 spot | U.S. | Reuters

Fri Mar 14, 2008 5:17pm EDT

PARIS (Reuters) - The U.S. economy lost the title of "world's biggest" to the euro zone this week as the value of the dollar slumped in currency markets.

Taking the gross domestic product of both economies in 2007, the combined GDP of the 15 countries which use the euro overtook that of the United States when the European currency surged to a record high of more than $1.56 per euro.



*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Dec 17th, 2008 at 08:03:18 PM EST
[ Parent ]
Euro area GDP down by 0.2% and EU27 GDP stable
GDP AND EXPENDITURE COMPONENTS
EURO AREA, EU27, EU MEMBER STATES AND MAIN PARTNERS

Second quarter 2008, in millions of euro, seasonally adjusted, at current prices
GDP
EA152 306 089.5
EU273 137 840.3
US2 287 559.2
JP781 681.8


*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Wed Dec 17th, 2008 at 08:15:07 PM EST
[ Parent ]
ok ok, I'll call it a draw until either side takes a decisive lead - probably due to a longer term currency shift rather than any need for the Euro to take on new members...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Dec 17th, 2008 at 08:19:19 PM EST
[ Parent ]
Euro is over .95 sterling at 1.00 pm GMT...

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Thu Dec 18th, 2008 at 08:01:05 AM EST
Lots of heads ready to explode...!

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Thu Dec 18th, 2008 at 08:04:00 AM EST
[ Parent ]
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Dec 18th, 2008 at 08:20:49 AM EST
[ Parent ]
You beat me to the post.  In Irish shops, goods priced in Euros still frequently are 30% over their |Sterling unit prices - reflecting exchange rates of 3 months ago plus the usual retailer scam mark-up.  There is now a huge consumer revolt against this with people going North or demanding their (Sterling surcharge) money back.  The significance of any exchange rate in the 90p plus range is that people start thinking in terms of 1:1 and expect to see price parity between Euros and Sterling in the shops - putting pressure on retailer margins - especially for the big multiples - and a lot of downward pressure on inflation.

At a time of very low consumer confidence, such real price reductions could also get the economy moving again - whilst playing havoc with Irish producer/retailer profit margins.  It will force great efficiencies, but also help mitigate the current crash in consumer confidence.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Dec 18th, 2008 at 08:18:09 AM EST
[ Parent ]
Bloomberg.com: News
Dec. 17 (Bloomberg) -- Robert Minikin, a senior currency strategist at Standard Chartered Plc, talks with Bloomberg's Nina de Roy about the prospect of the euro reaching parity against the pound.

Six months? May be closer to six days at this speed...

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Thu Dec 18th, 2008 at 10:51:15 AM EST
[ Parent ]
Maybe not even that.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Dec 18th, 2008 at 12:37:53 PM EST
[ Parent ]
Well, to correct myself, Minikin said "second quarter", so that may be as little as three and a half months -- so I should havew said 3.5 days... but even that may turn out short.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu Dec 18th, 2008 at 01:03:01 PM EST
[ Parent ]
That's not pancakes we can believe in DoDo.  You're flip-flopping. ;)

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Dec 18th, 2008 at 02:17:39 PM EST
[ Parent ]
A bet would be in order, but at the speed things go, we might not finalize the bet process before parity ;)

As a personal note, I am paid in Euros and live in the UK.

by t-------------- on Thu Dec 18th, 2008 at 12:53:15 PM EST
[ Parent ]
So will you be having a parity party?

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Dec 18th, 2008 at 12:57:15 PM EST
[ Parent ]
No, because I believe we are in a chaos phase. What comes up, might go down. Fast.

Though I believe most wealth in the UK is mainly funny money (and therefore the GBP would be appreciated against the EUR) I am considering that we are in the middle of a perfect storm, aand therefore I would be careful in making predictions.
I would find it quite normal (not really, but at least possible) than in 3 months we were are back to old levels (like 1.4).
Chaos and fluctuation are the words of the day.

by t-------------- on Thu Dec 18th, 2008 at 01:11:52 PM EST
[ Parent ]
I have to agree - extreme volatility in share and currency prices seems to be the order of the day and I wouldn't read too much into daily trends. However given that the Euro traded as low as 57p, parity seems to be quite an important milestone - particularly for popular perceptions in Britain.  Longer term I would actually fear that the Euro will go too high for the good of all our real economies- driven by safe haven and reserve currency status.  It doesn't make sense that the most stable currency also has the highest interest rates.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Dec 18th, 2008 at 02:09:31 PM EST
[ Parent ]
Define "stable".

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Thu Dec 18th, 2008 at 02:13:03 PM EST
[ Parent ]
Where you keep your horses to stop them from bolting...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Dec 18th, 2008 at 02:34:08 PM EST
[ Parent ]
otherwise the inverse of volatility compared to historic values and also compared to other currencies.  e.g. compared to Sterling fluctuations against third currencies

When yoou become the reference/reserve currency, all fluctuations are measured relative to you...

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Dec 18th, 2008 at 02:39:12 PM EST
[ Parent ]
That's an interesting hypothesis: that there is a benchmark currency against which other currencies move less than they do against each other...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Thu Dec 18th, 2008 at 02:43:08 PM EST
[ Parent ]
Of course there should ba a parity party, and all the better if it swings back later. Then we can have a second parity party! :-D

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Dec 19th, 2008 at 10:29:46 AM EST
[ Parent ]
I thought the sons of Neptune could only cross the parity line once?

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Dec 19th, 2008 at 11:15:45 AM EST
[ Parent ]


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