Of Francs, Marks, Drachma, Lire and Pesetas

Going through some possessions recently, I came upon a box of coins that I had collected as a kid.  The items in the box resembled a graveyard of currency.

Since 2002, the euro has been the monetary unit for most of Europe.  It is the official currency of 17 states, and the unofficial, daily monetary exchange for five other, smaller countries (such as The Vatican and Monaco).

French francs, Italian lire, German marks, Irish punts, Spanish pesetas, Dutch guilder (and many other European currencies) are now all obsolete.  They are nothing more than collectors’ items.

However, if economic conditions continue to trend negatively in parts of Europe, we may see the reintroduction of some of these defunct currencies.

Prof. Paul Krugman

Nobel-Prize winning economist, Paul Krugman, recently wrote of the troubles facing Europe and the euro in the future.  For years, European economists mocked their American counterparts for refusing to blindly cheer on Europe’s progression toward a single currency.

Right now, countries on the periphery of the European Union (EU) are facing economic troubles.  Greece just received assurance of a major cash infusion from the European Central Bank.  That nation was on the brink of failure.  The “Celtic Tiger” (a name applied to the robust, young economy of Ireland over the past several years) has now been caged and neutered.  That island nation now faces years of strict austerity.  Portugal, Estonia, Lithuania and Bulgaria all face tough economic futures.

Until recently, the larger European states had weathered the world economic crisis without significant turmoil.  Unfortunately, Spain’s overinflated housing bubble just burst.  This will have potentially disastrous consequences.  As many as 20% of Spaniards are unemployed at this time.

Perhaps it would be helpful to back up and give some history.

Post World War II, as the nations of Europe were being rebuilt from the ruin of war, their leaders came to realize that a collaboration between states was the best way to avoid the wars which had devastated the continent for centuries.  It all started with a coal/steel pact between two historic enemies, France and Germany.  Over the past 60 years, the countries of Europe have moved closer toward a union of states modeled to a certain extent on the United States of America.

The EU now consists of 27 nations.  Trade barriers and border controls between these countries have now vanished.  It is very much like traveling between American states.

The high point came in 2002 when the euro became the sole, official currency for many EU nations.  The same euros were legal tender whether buying pastry in Vienna, fish in Naples, scrap iron in Munich or pot in Amsterdam.

The European Union

The one notable exception to the money party was Great Britain.  Out of caution or out of national pride, they kept their pounds.  Now, they look all the wiser for it.

You see, although the EU somewhat resembles the USA , it is vastly different.  California and Florida have their own laws and state governments.  However, there is a strong federal government above these states.  There is also a strong, unified national fiscal policy.  Although those states are now facing financial difficulties, they will not default or be kicked out of the Union.

Europe is different.  Ireland and Greece are sovereign states that have agreed to cooperate with the Union on certain issues such as trade and currency.  However, there is no strong central authority fixing a mandatory financial policy.  This causes extreme financial tension within the EU.

According to Krugman:

During the years of easy money, wages and prices in the crisis countries rose much faster than in the rest of Europe. Now that the money is no longer rolling in, those countries need to get costs back in line.

But that’s a much harder thing to do now than it was when each European nation had its own currency. Back then, costs could be brought in line by adjusting exchange rates — e.g., Greece could cut its wages relative to German wages simply by reducing the value of the drachma in terms of Deutsche marks. Now that Greece and Germany share the same currency, however, the only way to reduce Greek relative costs is through some combination of German inflation and Greek deflation. And since Germany won’t accept inflation, deflation it is.

Germans citizens had to swallow the economic woes of the failed state of East Germany in early 1990s.  Once the champagne of reunification had stopped flowing, Germans faced sober economic realities.  They bore them.  Now, citizens of Europe’s most economically-advanced nation are less likely to willingly shoulder the yoke of financial obligation to prop up Greeks, Portuguese and other peoples far away from Düsseldorf.

Paul Krugman points out that another key difference between the EU and the USA is that, in America, we share a common language and culture.  If you lose your job in Las Vegas when your employer goes bust, you can move your family to Phoenix to accept another job.

Not as easy in Europe.  Kind of hard to move your family from Slovenia to Slovakia.  You don’t speak the language and (unless you possess exceptional job skills) your chances for reemployment are slim.

Additionally, there is no guarantee that all states will remain in the EU.

E.U. Flag

Krugman has explained that if, say, the people of Greece get nervous over rumors that the government will be bringing the drachma back as currency, they will rush to their banks in order to withdraw their money.  They will then seek to put their funds into euros in a German or French bank, fearing that the drachma will be devalued against the euro.  In such case, the Greek government would be forced to close the financial institutions to avoid the bank run.  This could lead to a scenario in which Greece is either expelled or leaves the EU.

Does this affect the US?  In a word, yes.

Europe is one of America’s key trading partners.  In short, a strong Europe is in America’s best interest.

I hope those coins I have in the box remain mere souvenirs forever.

— The Major

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