The Future of The Euro

In last months poll we asked if you thought the media were having a positive or negative impact on house prices. Whilst I will admit to thinking at the time that this would be a pretty foregone conclusion, the results do state that the general consensus of opinion is that the press are up to no good when it comes to house prices....

In last months poll we asked if you thought the media were having a positive or negative impact on house prices. Whilst I will admit to thinking at the time that this would be a pretty foregone conclusion, the results do state that the general consensus of opinion is that the press are up to no good when it comes to house prices.

The question asked was "Do you think the media have a positive or negative effect on house prices?"

  • 85% said the press is prolonging the recovery, and
  • 15% said the press is helping the recovery.

This month, despite Royal Wedding fever and Irish Bailouts, the future of the Euro is the subject of discussion in much of the press. Should it stay or should it go?

Looking back, it seems like only yesterday the Euro was launched upon the world, promising monetary unification, ease of lending and shiny new coins and notes. The reception of it was mixed to say the least. At the time, I lived in Europe and worked as a sub contractor to American and Canadian companies, usually being paid in USD, so at the time it was just another change to the currency conversion I was already having to do.

Many of the European countries viewed the change as positive on the whole, but with caution due to the amount of change that would need to happen with respect to anything that processed coins and notes, and the actual exchange rates that would be determined at the time of change-over (not to mention the cost). There were staunch naysayers that refused the change and protested that their currency was a part of their patriotism and should stay the way it was, which to a point was fair enough, but hardly a sole basis for keeping a currency.

I remember reading at the time, numerous UK press articles stating less salubrious points of the Euro, one even to the point that we would all succumb to nickel poisoning, and the blind would have no idea because the coins were all confusing (apparently sequentially incremental coin sizes and notes would be more complicated than, say, the UK coinage where a 2p is bigger than a 5p, a 10p and a 1 pound coin for example).

In light of the recent Irish bailout though the very existence of the Euro itself is coming into question again. Despite there being a 750 billion Euro bailout fund in existence to cover debt for countries that are up a certain creek without a paddle, it would seem that one idea is to disband the Euro altogether and let the ailing debt ridden countries get on with their own problems and play the game of "I'm alright Jack".

As convenient and nice an idea as this might be, there are a few things to consider. The primary one being cost. When the Euro was introduced, the estimated cost to the countries involved was in the realms of 100-130 billion GBP, quite a sum when you think about it, and unlikely to be any less for a reverse conversion now. Doom and gloom was predicted at the time of the launch and mass confusion predicted because people wouldn't be able to work out what things were worth, and retailers would rip everyone off with poor conversions and pricing.

To some extent, there was a little bit of robbery going on by retailers - the conversion wasn't always that accurate, but in all fairness, you couldn’t move for conversion charts everywhere you went that had the Euro. At the initial changeover I was in Spain, the rate at the point of exchange was 166 Pesetas to the Euro. Simple conversion on everyday items wasn't too hard provided you had some knowledge of arithmetic. 3 months later I was in Holland where the Dutch Guilder had been changed also. 2.2 Guilders bought you 1 Euro - again very simple.

The changes I saw seemed to happen very smoothly, a few things went up in price of course, but no life threatening price rises, the only real negative for me was the removal of activity on the currencies during the summer period. Being paid in USD would normally mean that the average trade in the winter months would get me about 145 to 150 Pesetas, in the summer I could get as high as 200 occasionally - the Euro removed most of that opportunity.

Life has moved on though, and not even a decade later - the suggestion that everyone should convert back again seems a little mad to say the least. Aside from the cost involved - which were high last time, it certainly won't be any cheaper - there is also the rigmarole of switching the systems around again. Holland was pretty efficient when the Euro was introduced - by the end of the first year nothing had a Guilder price tag on it, and the only remaining Guilder notes you would see would be framed on the wall in a local bar. Spain on the other hand still has some things priced in Pesetas even now!

Even if the cost could be swallowed up - releasing that many currencies onto the open trading markets is perhaps a wild idea at best. What exchange rate do you put them on? The same rate they came in with? A different "revised" rate? Not just that, what do you call them? The same as they were before? Or make up a new name? All the old notes have been destroyed, so the opportunity is there to start afresh - perhaps leading the way for an inventive currency like "beer tokens".

On a more serious note - even if the Euro countries could be permitted to go their separate ways, what about currency pegging? Would it be allowed? What about devaluation? As much as devaluation is going on anyway with quantitative easing in the UK and the US, is allowing free-floating currencies after an 8 year tie-up the answer?

Personally, I don’t believe disbanding the Euro is the answer right now. There is an old saying "keep your friends close, and your enemies closer" and to a degree, for those in the Euro, it does exactly that. I would agree it could do it better of course - if it did then there is a good chance the Irish and Greek financial bailouts could have been avoided, or at least greatly reduced.

The crux of the matter isn't really about the Euro right now, and it's not the Euro's fault. The key points that have caused the need for bailouts are more down to the issue of bonds. In a nutshell, when cash gets tight at a government level, the country in question will issue bonds to raise money - in effect a loan. The problem arises when said bond issuer can't afford to pay it back. According to Ireland's Independent, a survey conducted said that the Irish public wants to default on the debt it has (basically run away). A nice idea, and perhaps a short term fix, but the survey failed to ask exactly how the Irish economy would continue over the long term by burning its bridges in such a reckless fashion.

Another point worth remembering is when the Pound took a thrashing almost to the point of parity to the Euro - had it continued to drop it would likely have had no choice but to accept the Euro as its currency of choice (something that would not have gone down well in the UK to say the least!), painful as that might have been, it would have opened up the choice of bailout options for the UK should it ever need them.

The point at hand though is the future of the Euro itself. Should it remain? Or be thrown out altogether? For me, it removed some opportunities (like making money on the exchange rate when I got paid) but presented others such as ease of billing and removing the need for conversion costs and calculations depending on where I happened to be at the time. In my opinion now, I think scrapping it this early in its life would be costly and foolhardy to say the least - there are just too many potential pitfalls for too many countries, both in and outside the Euro if it is scrapped.

What do you think? Should Euroland be able to make its own way?



- Tuesday 30 November 2010

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