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Commentary

The Euro and Economics


     
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Whether the new "euro," the common currency now in place for electronic transactions in 11 European countries, will be good for European consumers and the world economy could depend on whether it works out as planned by its instigators or sets in motion unanticipated but beneficial consequences. A possibility that is seldom considered is that the euro and other government currencies will be made obsolete by technological developments beyond the control of government bodies.

The big idea behind the euro is that it will reduce transaction costs and make most of Western Europe (Great Britain, Sweden, Denmark and Greece aren't in the euro game) a common market, a unified economy large enough to rival the United States and Japan. Most European leaders expect or hope that in time the euro will compete with the dollar as the preferred instrument of international financial transactions. By eliminating often confusing currency fluctuations and making prices more "transparent," the single currency should make business deals and consumer decisions within the 11 participating countries easier and more efficient.

The idea (and the way it has been implemented) has drawn criticism. In an essay in the excellent book, "Money and the Nation State" published late last year by the Independent Institute in Oakland, Kevin Dowd - a professor at Sheffield Hallam University in England, writes:

"Most European politicians and civil servants see a strong state as necessary to protect their' citizens, whom they regard as unable to look after themselves. This paternalism in domestic policy goes hand-in-hand with a mercantilistic view of the world, which sees the world economy primarily in terms of mutually antagonistic trading blocs in a state of near-permanent trade war with one another. This Fortress Europe' mentality has been associated with the promotion of an artificial sense of European nationalism whose principal characteristic is animosity to the United States and Japan."

Fear that European monetary union will promote the development of an integrated protectionist trading bloc that would ultimately be harmful to free international trade -- along with the fear that the euro is simply the first step toward creating a centralized European "super-state" with uniform and uniformly onerous taxes and regulations -- is the main reason Britain has declined to participate in the euro system for now. And if a euro-facilitated powerful and "harmonized" protectionist Europe ensues, it could lead to trade wars that would disrupt the world economy and do great harm --especially to European consumers who would mainly be "protected" from lower prices as inefficient producers are protected from competition.

But David Malpass, chief international economist at Bear Stearns, writing in the Wall Street Journal, believes that "the central planners are wrong. The euro will produce less government. Financial markets will be working overtime to thwart the harmonizers. Countries and cities that provide more attractive tax regimes and regulatory policies will be rewarded through job growth and wealth creation. Governments that plead for Brussels to protect them, as Germany's has done on tax competition, will find few hiding places when capital markets begin to evaluate winning and losing policies within Euroland."

Mr. Malpass's argument is that with one currency and a unified interest rate, it will become more obvious how tax rates and regulatory systems influence economic development. Thus European governments will have an incentive to compete to attract investment by cutting taxes and reforming regulations.

One may hope. Politicians, in Europe even more than in the United States, hate to cut taxes. And the euro's value will not be free of political influence.

Another possibility is that all these currency manipulations will be made obsolete by the development of some sort of "e-money." Nobel economist Milton Friedman recently told MSNBC tech writer Barton Crockett; "There will develop e-monies which can be encrypted and are anonymous. And when that develops there's nothing to prevent people from engaging in economic activity over the Net without leaving a record for government to track."

Macalester College anthropologist Jack Weatherford, author of the popular new book, "The History of Money," agrees that the demand and technology already exist and it's a matter of time. "There's just too much money to be made for people to leave it alone," he says

That won't happen overnight. It has taken 50 years for credit cards to account for 10 percent of consumer transactions in North America. But the Web has penetrated consumer markets faster than the telephone or television did. Amazon.com is now valued by Vail Street at three times the value of Barnes & Noble and Borders Books combined. In a world of borderless e-commerce, any of a dozen small Third World countries could make a bid to become the next Hong Kong by creating untraceable electronic cash and slashing taxes. Who knows?

Whether the euro (and the dollar) are eventually trumped by e-cash or not, it will take years to sort out all the implications of the euro, especially since some of the implementation will be improvised over the next three years. We hope Mr. Malpass is right, that it will eventually lead to government downsizing, but we'll keep a skeptical eye out.


This article appeared in the Orange County Register on January 8, 1999






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