Posts Tagged ‘euro’

Numberscruncher: Wither the European Union?

Abraham Lincoln was born 201 years ago last week. He was America’s greatest president because he took charge in a time of crisis, a civil war that seems unimaginable in these days of splitting hairs and massive overreactions.

The outcome of the civil war wasn’t just an end to slavery. It was a new approach to what it means to be a state. Join the union, accept our constitution, and don’t expect to get out if you don’t like the way things are going. “This government of the people, by the people, for the people, shall not perish from the earth”, Lincoln said, no matter how much time and energy Todd and Sarah Palin devote to the Alaska Independence Party.

The U.S. government creates a constant tension between the rights of the states and the powers of the federal government. The duplication of effort is sometimes ridiculous; do we really need fifty standards for how to drive? Fifty different childhood vaccine schedules? You’d really think this could be standardized, couldn’t you?

And yet, somehow or another, it works, at least most of the time.

The European Union is an attempt to bring the nations of Europe together to create a superpower to rival the United States. There’s one key difference: many of these new allies have been enemies for centuries. The continent had three genocides in the twentieth century alone (in Armenia, Germany, and Bosnia.)  Somehow, the disputes over whether Connecticut was allowed to have colonies or whether Ohio could be its own state seem quaint in comparison.

At the same time, the people of Europe aren’t stupid. They realized that they could only be a force in a global world if they put aside their historical hatred and worked to cooperate. In with various treaties, councils, and committees, the post-World War II period has been one of European nations working together for collective economic strength. The culmination was the formation of a common currency, the euro, in 1999. It would simplify trade and travel by reducing exchange hassles, and it would make it easier for companies and countries to raise money. Not every European nation joined the euro; the U.K. made a point of keeping its own currency, while many nations that wanted to go on the euro had to wait to meet its economic standards.

Greece went on the euro on 2001. And now, in 2010, the country’s economic problems threaten the stability of the euro. Greece is in danger of defaulting on its massive government debt (some of which was taken on the pay for the Olympics, and yes, I’m one Chicagoan who is happy to have dodged that bullet.) Greece needs a bailout. The choices are for the Europeans to do it or for the International Monetary Fund (i.e., the United States) to come in.

So far, the European Union has said that it will arrange a bailout of Greece, although no one in charge has revealed any details. Beyond the crisis in Greece, the EU members have to decide if they will handle all members on the verge of default similarly (it looks like Ireland, Italy, Portugal, or Spain could be next); if members can be expelled from the euro or from the European Union; and if it will still consider Iceland’s membership given the problems with its current members.

California and Illinois are on the verge of bankruptcy. If that happens, I have every confidence that the federal government will step in and bail them out. Somehow. It won’t be pretty, and it won’t be without controversy. But we are a union of states. We have a 234-year history. We can work it out. Can the EU?

It’s going to be interesting to watch.

Countries and Currencies

85616601Different countries are…well, different. They have different laws and languages, funny stamps, and candy that you can’t get at home. We usually think that part of being a distinct country is having a distinct money, too. Currency is becoming less important to national sovereignty, although it is still fraught with diplomatic and political issues, not to mention economics.

Having your own money implies a certain governmental sophistication. After all, a currency needs mechanisms to support it. There has to be a central bank that takes care of interest rates, buying and selling reserves on the open market to maintain trade balances. There has to be a government that takes charge of taxation, spending, and borrowing to keep the economy growing and make the currency of value. It’s a lot of work, although there is a nifty little perk called seigniorage, or government revenue that comes from printing money.

The European Union did a masterful job of converting most of the continent to a single currency, the euro, in 1999. It’s a successor to a similar currency that was used only for trade, the ECU, which was established in 1979. But the euro has only been in existence for a decade, and it hasn’t been tested by a financial crisis before. It’s unclear how the currency will hold up, because the EU makes only some of the decisions about economic policies for member countries.

The U.S. government doesn’t seem to care if other countries use the dollar. In some cases, it’s thrilled: the Chinese government pegs the yuan at about 7 per U.S. dollar. If China were to let its currency float freely, the cheap Chinese goods that U.S. consumers love would become a lot more expensive in dollar terms, hurting our economy. Panama doesn’t even bother with a peg. It uses the same greenbacks used everywhere in the 50 states.

Which brings us to the problem of Iceland. With 300,000 people and a GDP of $12 billion, it’s the smallest economy in the world with its own currency. The bank collapse last year was caused in part by the currency becoming too valuable relative to the dollar and the euro. Currencies can be bought or sold like any commodity; just as with stocks or real estate, if the price gets too high, people sell and invest elsewhere, popping the bubble. Now Iceland is left with a currency that’s lost about 20% of its value while the nation’s leaders are trying to assure the world – and Icelandic citizens – that is it safe to invest. (more…)