Introduction:
This talk
is a continuation, or an addendum, to the Non-Org talk that I gave last October.
At that time I outlined the reasons why the member countries of the European
Monetary Union (EMU) had decided to replace their domestic currencies with a
single new one (i.e.: elimination of exchange risk in intra-EMU trade and
finance operations, stronger price discipline...) I also described the most
likely risks of this enterprise (i.e.: coordination problems regarding fiscal
policies, one-size-fits-all monetary policy...) and this will be a good time to
asses the reality of some of these worries too, as well as the promises of
future prosperity.
Last October we went over the logistics of replacing 12
(decades-old, or even centuries-old) individual currencies with a single new
one. As neat and simple as the process might seem on paper this would also be a
good time to evaluate how the transition worked out in practice. I was very
happy to be able to witness that historical event in situ, in the streets and
businesses of Madrid, Spain.
If you
came to this talk curious to learn about how the Euro is doing after January
1st, 2002, I am sorry to tell you that you are somehow late. The Euro is now
more than three years old and the record is very positive.
The Euro was officially created in January 1st, 1999, when
the, at the time, 11 members of the EMU fixed their exchange rates (ERs) with
respect to a new accounting entity previously known as the ECU and now re-named
the Euro. The fact that the EMU countries were able to sustain those fixed ERs
gave them access to the full range of benefits from a monetary union -outlined
in my previous talk:
- Inflation rates have been converging to the low levels
of the leading countries (i.e.: Germany and France) This convergence in prices
has been more marked for durable consumption goods (e.g.: home appliances)
than for services simply because services are not exposed to international
competition.
- Government deficits, on average, have been reduced from
ratios of 5% of nominal GDP to less than 1%. This has been partly the result
of the convergence criteria required to participate in the final phase of the
EMU and partly the consequence of lower interest rates in the EMU that have
reduced the financial costs of the outstanding debt.
- Although the Euro has lost 20% of its value against the
US Dollar during this time that has translated into more competitive European
exports and therefore more domestic activity. The reasons for the loss of
value of the Euro would be too long to analyze for the format of this talk.
So, in
conclusion, if my first talk about the Euro I outlined the macroeconomic impact of
the single currency this talk will look into the microeconomic aspects of the
transition. Keep in mind that some of these "micro" issues (i.e.: rounding out
of prices in Euros) will have a "macro" impact (i.e.: potential higher
inflation) due to their cumulative effect on aggregate economic activity.
As
always, it is good to start a talk with one (or more than one) joke:
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