NCPA - National Center for Policy Analysis

Euro Conversion

December 19, 2001

Last Friday (December 14), the European Central Bank began distributing euro coins to the public. On January 1, 2002, virtually all existing European currencies will start to disappear for good. By February 28, the euro will be the only currency accepted throughout most of Europe, and will denominate all prices. National currencies unconverted by March 1 will become worthless.

Rather than challenging the dollar's supremacy as the currency of choice in international business, the euro has fallen more or less steadily. Initially, one euro was worth $1.19; today, just 89 cents.

The distinguished monetary economist Anna Schwartz is skeptical about the euro. Writing in "The Region," a publication of the Federal Reserve Bank of Minneapolis, she notes:

  • New currencies normally are introduced after political union, but the euro is being introduced before the nations of Europe have joined together into a unified state, and there is no evidence that it will speed political integration.
  • Although the euro zone has economic output about equal to that of the United States, the euro has failed to demonstrate that it can be used as a secure store of value, unit of account or medium of exchange, in Schwartz's view.
  • Until it does so, the dollar will continue to be the world's dominant currency.

In the near term, euro conversion is likely to slow growth and inflation in Europe, as the supply of underground cash dries up. In fact, cash transactions are up throughout Europe, as people rush to buy jewelry, paintings, luxury cars and even houses with underground cash.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 19, 2001; Anna J. Schwartz (National Bureau of Economic Research), "Assessing the Euro Three Years After Its Launch," Region, December 2001, Federal Reserve Bank of Minneapolis.

 

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