NCPA - National Center for Policy Analysis

Underground Economy Prepares For The euro

June 27, 2001

Over the next few months, countries in the European Union are withdrawing their individual currencies and coins from circulation and replacing them with something called the "euro."

The euro has not become as popular outside Europe as expected. Although it was initially valued at $1.19, it has fallen fairly steadily to a current value of just 86 cents.

Europeans have even take steps to give euros an advantage over dollars, by printing large quantities of 1,000 and 500 euro notes -- much bigger than the largest U.S. currency in circulation, the $100 bill.

Large denominations are preferred in the underground economy -- which includes not only criminal activity, such as drug dealing, but much ordinary commerce that people simply wish to avoid reporting to tax collectors.

Because taxes are so much higher in Europe, the underground economy there is about 50 percent larger than here.

U.S. dollars have been preferred in the underground economy, which explains why the U.S. "exported" more than $22 billion of currency in 1999.

In Europe, rather than drawing the suspicion of law enforcement by converting their local currencies to euros, those with large stashes of cash have been buying real assets.

  • In Spain, this has led to a real estate boom that has driven housing prices up by 27 percent in the last 2 years.
  • In the Netherlands, the unexpected repatriation of underground cash from abroad has caused the guilder to fall by 7.9 percent.

It would help the dollar compete if the Treasury once again issued $500 bills.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 27, 2001.

 

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