General Question

Vincentt's avatar

How has the Euro been beneficial?

Asked by Vincentt (8043points) May 31st, 2009

With the current financial crisis, we’re often told that, had we still been using the Guilder in the Netherlands, we’d have been much worse off, perhaps even Icelandic situations. And indeed, the value of e.g. the British Pound has plummeted. However, why exactly is this a bad thing, and what does the Euro have that makes it more stable than, for example, the Guilder?

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36 Answers

ragingloli's avatar

let me be lazy and copypaste from wiki:
“The most obvious benefit of adopting a single currency is to remove the cost of exchanging currency, theoretically allowing businesses and individuals to consummate previously unprofitable trades. For consumers, banks in the Eurozone must charge the same for intra-member cross-border transactions as purely domestic transactions for electronic payments.”

“The absence of distinct currencies also removes exchange rate risks. The risk of unanticipated exchange rate movement has always added an additional risk or uncertainty for companies or individuals that invest or trade outside their own currency zones.”

“Another effect of the common European currency is that differences in prices—in particular in price levels—should decrease…”

and my own two cents: it is more stable because it is a continental currency, which means that an economic crisis in one single country will not as likely devalue the currency across the continent, while a national currency would (as you yourself remarked about the british pound)

oratio's avatar

What @ragingloli wrote. One thing that is good with a weak currency is that it helps exports, but it is equally bad for imports.

Sweden has managed to stay afloat ok, even though we haven’t got the euro. But, the support for the euro has increased greatly with this crisis. The euro is good. Just wish they had a better name for it. And we will join sooner or later. It’s good for the individual countries and for the whole union.

ragingloli's avatar

and it would be a bad thing because economies are interconnected. a lot of stuff is imported. a drop in currency value against currencies of other nations, means that companies have to pay more for the imports, and in turn they have to raise prices inland, meaning you have to pay more, without necessarily having higher wages.

Vincentt's avatar

@ragingloli – I get that, but how does removing the cost of exchanging currency prevent it from plumetting in value? How does an economic crisis devaluate a national currency, and why doesn’t this happen with a continental currency even though all the countries there are hit by the crisis?

@oratio – so then how come the Swedish currency hasn’t been affected that much, and why has support for the Euro increased greatly even though Sweden hasn’t been affected that much?

oratio's avatar

@Vincentt Oh, the currency dipped quite hard, and we had a lot of lay offs, but we have a big export and has managed to stay with our nose above water. We also have a tight social security system that catches people when needed, and it works.

I wouldn’t say that the crisis made people positive to the euro, but more that people are beginning to understand that the swedish crown isn’t worth much in an international context. People are not that suspicious of the euro anymore and begin to get used to it and see the benefits of it.

Since our export is mainly to the rest of the Union, it would be unwise to stay outside. The support for the euro has increased since we said no to it in our referendum, but the crisis did help to push ambivalent people over.

ragingloli's avatar

@Vincentt
i don’t really know, since i am not an economist, but i found an article that i think sums it up pretty well:
http://www.economicshelp.org/2008/12/what-causes-currency-collapse.html

oratio's avatar

@Vincentt Removing the cost of exchanging currency helps trade, and the more trade the more production. It helps growth. The Union is the biggest economy in the world, bigger than the US and I attribute part of that happening to the euro, and the growing common market.

oratio's avatar

@Vincentt One thing that could be seen as a problem for the individual country in a micro perspective, is that it cannot adjust the rates as it sees fit. That happens in ECB in Frankfurt.

Vincentt's avatar

@oratio – right, export helped Sweden take on the economic cris and that’s easier when you have the same currency.

@ragingloli – thanks for that link, I suppose the third points explains it a little bit. You’re probably more confident in the EU as a whole than in a single country. Still, it doesn’t really feel satisfying, so if an economist is willing to chime in… ;-)

Jack79's avatar

I know a lot of people everywhere in Europe are complaining, but it’s not the Euro’s fault for what has happened. If anything, it has actually offered stability. As a currency, it represents the average economy of the eurozone, and yes, perhaps Holland was better off to start with than, say, Greece, but at the same time sharing a currency with other stable countries such as France and Germany can only be a good thing. There are no fluxuations, and this offers security.

There were of course various hickups when the change happened, especially in countries where it was harder to calculate the new price with simple maths, and where there was no relationship between the old and new currency. For example, I lived in Germany when the transition happened, and 1 euro was worth almost 2 marks. Germans just had to get used to the idea that the new grey-bluish 5 euro note was worth the same as the old bluish 10 mark note, and that the highest coin (2 euros) is a bit less than the old 5 mark coin (2.5 euros).

But then I moved to Greece, where a euro was 340 drachmas, and this meant that the 2 euro coin (which is considered “change”) corresponded to 680 drs, almost 7 times higher than what used to be the highest coin before that. Yes, there were 200 and 500 dr coins, but they were limited editions for the Olympics. Then Greeks also added to the confusion by making the 20c and 50c coins look like the 20dr and 50dr coins, which were 3.4 times less valuable. As a result, a bottle of water jumped from 50drs to 50c, and most everyday products (such as bread and milk) followed. Bread now costs 1 euro (which is 340drs) as opposed to 70 drs in 2001. That’s almost 5 times up in 8 years. Yet salaries were just calculated into euros and have risen at the normal rate of 2–4% per year. The big problem is that nobody noticed. People in Greece tend to think of the 10 euro note in the same way they thought about the 1000dr note (which is worth less than 3 euros) and parents might give their kids a 50 euro note as pocket money, not realising it’s 17,000 drs. And the same is true in many other countries.

So it’s not the currency that’s the problem, it’s the inability of the people to adjust to it in some situations. But overall it is a good thing, even though its effects are long term. I am sure that things would have been a lot worse if it weren’t for the euro (I lived in Poland at the time of the crisis and you have no idea how much worse things are there, with the Zloty jumping up and down on a daily basis. Holland is a paradise in comparison).

Vincentt's avatar

@Jack79 – hell, I’m not pleading anything, merely wondering how the Euro has been beneficial. The reason I’m asking is because I’m usually claiming it has been beneficial, that the Euro has prevented us from being much worse off, because that’s what I was told by economists, but I’d like to know the reasoning behind that. I’d like to know why there are no (or almost no) fluctuations. Why is the situation in Poland so bad?

The story about Greece was very interesting though :)

walterallenhaxton's avatar

It has been managed better that the dollar lately but it is a fundamentally unstable currency. Useful while it remains stable. When they start printing up a lot it will fail. One currency for a lot of people means more damage when it fails than lessor currencies cause when they fail. Measured amounts of gold and silver have never failed unless they have been diluted with base metals and been given a fraudulent value. They need no backing by anyone.

oratio's avatar

@Vincentt For one, they have 13 % unemployment. This crisis ain’t doing them any good, and their currency fluctuates.

ragingloli's avatar

@walterallenhaxton the euro certainly is a heck of a lot more stable than “lesser” currencies.
and gold and silver are utterly impractical in todays economies

walterallenhaxton's avatar

@ragingloli Why is a bad currency necessary today and a good one impracticable? Gold makes great coins of many sizes right down to 1G, They are going to 50$ right now. Silver and palladium and platinum also make great coins.
They are actually even better that they were in the past as currency. We have debit cards today so you do not have to carry your precious metals around with you. The only problem with them is that they remain what they are and can not be given an artificial value. They are the property of their owners not of the central bank.
Anybody with the metal and the know how, equipment can make some more. That is not counterfeiting of money. Printing of money on worthless paper which is not backed by goods you posses is. With everyone making some will we have inflation like with paper. No way. These metals are useful. If too many coins are out there it will be cheaper for the users of the metal to melt the coins down rather than buy bullion.

Darwin's avatar

All I can say as an American and a consumer, is that the Euro makes purchasing books from European sellers much easier because it is so much simpler to compare actual prices and simplifies the currency conversion process.

And I assume that is a desirable thing not only in the eyes of the American buyers like me, but also in the eyes of the European sellers who may sell more books to the US than they might have otherwise..

Jack79's avatar

The situation in Poland is bad because as soon as Poland joined the EU, half its work-force moved west in search of a better future. The salaries everywhere else are higher. In theory, this could be good, meaning there are more workplaces to be filled inside the country, but in reality it’s not. Because the people who left Poland are its most able citizens, meaning that what they left behind are pensioners and children, as well as those who were not fit enough or qualified enough to get a job elsewhere. The social implications are even higher than the financial ones, as there are not many young people around. Parents have often left their children behind to be brought up by a grandmother. And due to the huge influx of Poles to the west, as well as the overall economic crisis everywhere, it’s not as if the people who left became millionaires and have been sending back any serious amounts of money.

This is the overall picture I got anyway. As far as the zloty goes, not being in the eurozone means there have been huge fluxuations, since people feel a lot less confident about the zloty than they do about the euro. As a matter of fact, during the final months of last year, the euro was a lot stronger than the dollar, at least in the way people perceived it. The economy is often based on confidence and perception, rather than objective reality (a simple example is that you’d be willing to buy shares of a company based on how much you think they could be worth in the future, rather than their actual value now).

Vincentt's avatar

@walterallenhaxton – I do think the European Central Bank also realizes that printing a lot of extra Euro’s will cause inflation.

@Darwin – still makes me wonder whether and how that makes the Euro more stable. Surely, just making it easier to buy stuff hasn’t prevented the economic crisis from striking hard?

@Jack79 – hmm, you’re making me feel a tad guilty here. It’s definitely the case that a lot of Poles came to work in the Netherlands. What’s worse, is that even though the pay may be higher than it would have been in Poland, they’re often working below minimum wage. You’ve at least convinced me that unrestrained work migration from new EU member states like Romania and Bulgaria, and perhaps e.g. Turkey some day, is a bad thing for those countries as well.

Still leaves me to wonder why people feel less confident about the zloty.

Jack79's avatar

It’s all a question of perception. The zloty can go down a lot easier than the dollar or euro can. This means, that if you have say 10,000 zloty at home under your pillow and prices suddenly go up, you won’t be able to buy that car you wanted. But if you have 2,500 euros instead, their buying power will remain more or less the same. Prices in the eurozone rise, but slowly and steadily (compare this with Turkey which a couple of years ago had 10,000% inflation rate).

oratio's avatar

@Vincentt Also, small currencies are very vulnerable. The Swedish crown was broken by international finances lead by George Soros in the 90’s. A small currency can be speculated away in a jiffy, if the conditions are right, and react much more to incidents that for a large currency is minor.

walterallenhaxton's avatar

@Vincentt Do they also realize that putting the interest rate low will create malinvestment and a future crises and that they need to make the interest rate a market phenomena and that it must not be controlled by a few men?

oratio's avatar

@walterallenhaxton I am curious. Why are you hostile towards the euro? Is it political or practical? I see more benefits than drawbacks myself, but there are always many aspects to consider.

Darwin's avatar

@Vincentt – I didn’t say that my comment effectively answered the question about the stability of the Euro, only that if non-Europeans view the Euro as a useful currency then international sales should be higher than if we were still dealing with many different small currencies. In tough economic times, those sales may be all that is keeping some businesses afloat.

As others have said, it is a question of perception.

Vincentt's avatar

@Jack79 – sure, but then why do prices in the Eurozone rise slowly and steadily while in Poland they rise that quickly? Just mismanagement (like in Zimbabwe)?

@oratio – right, so my question is: why are small currencies more vulnerable?

@walterallenhaxton – I don’t know, but I do trust the people of the European Central Bank, who have studied for what they’re doing, that they’re capable of doing that (or at least more capable than I am, so I daren’t question them).

Jack79's avatar

I guess you could call it that. The situation is more chaotic. One person raises the price of his product, then the neighbour can’t afford it and raises his, then everyone else follows, then everything is too expensive so the government devalues the whole currency, but then the first person (or someone else) does it all over again, because it’s a vicious circle. That’s the simplest way I can explain it. But in the eurozone (which took several decades of planning to realise) things are more stable because all prices (and that of the currency) are regulated across a 300mil populance.

walterallenhaxton's avatar

@oratio I am hostile toward paper currency. It has no value except for what waste paper sells for. The theory that a few men can make a currency and not use it to steal with has never worked in world history and can not work for long in theory. Such groups of men can only resist the politicians and the natural diversity in their group for a very short time if at all. When such a currency is set up it immediately becomes political. Even small groups have politics.

As far as the Euro is concerned I wish the users of it all of the luck in the world.

I like my world currency even better. One face of the currency has a global logo on it and the other face has what ever manufactures logo that they desire to put on it. What is essential is that the two numbers on it be accurate. http://reasonrules.thinkertothinker.com/2009/06/01/the-global/
I am as you can see not an artist but it works for me.

oratio's avatar

@Vincentt Well, as I understand it, many things can influence the value of a currency. Currency is basically a commodity. Supply and demand is a part of it. If a country increases the amount of money, the value goes down. A certain currency is also attractive or not as investment or for trade and that influences the currency’s value as well.

I understand it as a big currency like the euro is not as sensitive to the influences as a small one. When George Soros broke the Swedish Crown in the 90’s he did it through currency trading. A small currency is sensitive to these influences when a currency like the dollar isn’t. In a way I think you can see currency in the same light as stock. A small stock’s value is more vulnerable for transactions than a large one.

But economy is more complex than this, and not my expertise.

mattbrowne's avatar

Absolutely. The benefits outweight the drawbacks by 10:1 at least.

walterallenhaxton's avatar

@oratio The USA is about to give you a demonstration of the bigger they are the harder they fall. Just watch closely and stay out of dollars.

walterallenhaxton's avatar

@mattbrowne Many currencies of dubious value are certainly a problem. Where do you put your money for safety when those people who control your currency are out of control. One of those little currencies might be useful then if they are running it properly.
You don’t have a bunch of idiots running things who can’t tell the difference between a loan made out of savings and one made by printing paper coupons.

mattbrowne's avatar

@walterallenhaxton – Should we go back to barter trade?

walterallenhaxton's avatar

@mattbrowne All trade is barter. We simply should not put control of the medium of exchange in a few peoples hands. They only take advantage of other people when that is done.

Vincentt's avatar

@walterallenhaxton – out of curiosity, where does your authority/expertise in this area come from?

walterallenhaxton's avatar

@Vincentt I have a mind capable of thought and observation and I study the subject.
The Latvian affair is a really stupid example of why not to put control in a few hands. Pegging a currency is one of the stupidest things that can be done. It encourages the printing of paper notes by the smaller country. Those who get them first walk away with everything of value and leave the rest of the people destitute.

oratio's avatar

@walterallenhaxton A very big part of the Latvian problems are due to insane decisions made by Swedish banks, not much different from american banks, which might just drag the Swedish Crown down as well. Sweden and swedish bank have large investments in the Baltics and much of it in Latvia. You should take this into count.

Didn’t you say that currency backed by gold was good? That is pegging the currency to gold value. How is that different from pegging it to euro, especially since it’s the most stable currency there is.

I agree that it’s not a good idea in the long run to peg a currency, but they have done so in preparing to join the eurozone.

walterallenhaxton's avatar

@oratio Currency pegged to gold is nonsense. I even think that silver and other precious coins should float in value. No when I talk about gold I mean measured amounts of gold. For general currency you would use your debit card and pay the bank a fee for keeping your metal. The banks would be required to deliver it on demand. If they did not then they would be arrested and jailed like any thieves from any storage locker.
For savings there would no longer be demand deposits. There would be a list of what the bank is paying for money for various time periods and penalties for early withdrawal if the bank could even let you do that.
I think that credit cards would be rare and small timed loans much more common.

There are a number of other countries involved in the same arrangement I understand. I wonder if they will make the same mistakes.

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