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Euro Matters

Mar 9, 2010 • Thinking Economically • 119 Views    No Comments

Said to have been one of the least-prepared countries to transition to euro cash, Greece was an original participant in the euro launch on January 1, 2002.  In the first major euro robbery, in Athens, a gunman ran off with 76,000 euros ($68,400).  During the early days of the launch, in Greece, only 50,000 of 300,000 businesses had been supplied with the new currency.  By contrast, in Denmark,  where “there were big queues at cash machines but it was very jolly with champagne,” the transition was virtually flawless and universal. 12 countries in all, amazingly, accomplished the massive task of circulating 6 billion euro notes and 40 billion coins.

But why?  We could say that it all came down to transaction costs.  Moving from country to country meant switching from escudos (Portugal), to francs, to guilders, to 12 currencies in all if we just look at the countries that initially pooled their monetary lives.  While tourists found it daunting, businesses had even more trouble.  Uniformity would not only stimulate travel and commerce, it also presented the potential for a world currency to rival the dollar. 

In a recent NPR Planet Money podcast, we hear how the creation of a single currency made sense but also created problems.  When acting alone, a country with fiscal problems might see its own currency decline in value internationally.  The decline served as a self-correcting mechanism that could ultimately solve the original fiscal difficulty.  Now, with 16 different fiscal policies and 16 different economies BUT ONE currency, the self-correcting mechanism is gone.

Perhaps all of this just returns us once again to opportunity cost.  Whether looking at the creation of the eurozone or its preservation, the benefits far exceed the costs for its members.

The Economic Life

Governments can influence economic activity through monetary policy.  Focusing on the supply of money and credit, the goal of monetary policy in the United States is stable prices, steady growth, and low unemployment. 

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