News:

Read all about the Grand Numismatic Alliance

Main Menu

Common Currency effects

Started by Galapagos, November 24, 2009, 05:20:29 PM

Previous topic - Next topic

0 Members and 1 Guest are viewing this topic.

Galapagos

Well discovered, a3v1.

According to a recent post by Christian:

"On 10-Oct-2010 the Netherlands Antilles will cease to exist. Some parts will become more autonomous, Bonaire, Saba and Sint Eustatius  become "ordinary" Dutch cities: Curaçao and Sint Maarten get a status similar to Aruba (and probably use a monetary setup similar to what they have)."

So there will be no Netherlands Antilles. The question now is, what will Curaçao and Sint Maarten choose?

"In 2002 the Euro was introduced on the neighbouring French islands of St.Martin, Guadeloupe and Martinique. But over time this currency has proven to be too high in value to fit the local economies."

Well, that's the problem with the Euro - one size MUST fit all! So what about the other solution: reduce your prices and wages to match? Politically difficult, of course.

So, when these changes go through, I will update the topic with the new facts - if I'm still around.

UK Decimal +

Quote from: Hardy Strong on November 24, 2009, 05:20:29 PM
So, when these changes go through, I will update the topic with the new facts - if I'm still around.

Maybe when your alter ego comes out of hibernation?  ;)

Bill.
Ilford, Essex, near London, England.

People look for problems and complain.   Engineers find solutions but people still complain.

chrisild

Quote from: Hardy Strong on November 24, 2009, 05:20:29 PM
Well, that's the problem with the Euro - one size MUST fit all!

That is the problem with the US dollar: One size must fit all - and contrary to what we have in Euroland, that "size" is decided upon in one single country only. But of course it makes sense for many Caribbean islands to use the currency that the Americans who travel there use. That is why the Aruba florin and Neth. Antilles gulden have fixed USD exchange rates, and I guess that whatever currency Curaçao and Sint Maarten pick, it will again be the US dollar with a different name. :)

Christian

chrisild

Quote from: Hardy Strong on November 24, 2009, 11:06:10 PM
If others care to use it, then that's their business.

Yes, that is the point I was trying to make - any country that uses the US dollar will have to face the fact that it will not have any influence whatsoever on the monetary decisions made in the US. With the euro you have a system of more than a dozen central banks that are involved in such decisions. But as I wrote, those Caribbean islands are geographically much closer to North America than to Europe, and most of their visitors are from the US.

So they have so far used currencies that were/are unilaterally tied to the US dollar, and will soon use the dollar "directly". What I find more interesting is the question whether it would make sense for the islands/territories in that area which actually use the euro (Saint-Martin, etc.) to use a different currency too ...

Christian

Figleaf

#4
I have heard this argument before. The problem is that it is also an argument to have a California dollar, a Texas dollar, a New York dollar, a Scottish pound or a Welsh pound. It is based on at least an incomplete understanding how economic adaptation works under a common currency.

The argument rests on the mistaken belief that all external disequilibria are worked out through the exchange rate mechanism. You can't blame people for believing that, since that's what you learn in secondary education. However, in that simplistic model, all disequilibria are of short duration, since currency traders will sell deficit currencies and buy surplus currencies until the current accounts are in equilibrium again. In fact, Germany, Japan and currently China are structural surplus countries, while the US, Italy and the UK are structural deficit countries. One factor that intervenes is interest rates. Britons pay for their over-consumption by paying more on their mortgages. The high interest rate convinces foreigners to borrow yen short term and buy pounds short term, knowing that in the long term the pound will lose value and the yen will gain value (carry trade). Another intervening factor is sovereign wealth funds, which convert structural surpluses into reserves, invested in deficit countries.

So what if Alabama has a structural deficit in trade with California? The exchange rate of 1 : 1 will remain unchanged, but if the deficit is paid, money will flow from Ala to Cal. Interest rates in Ala will rise a little (banks will call it additional risk), but not much, since there is an open border. Some Californians may buy a cheap house in Ala, financed with a mortgage in Cal, but the effect will be negligible. More important, unemployment will rise in Ala. This will have a downward effect on price and quality of goods for sale, but it wil also induce workers to move to Cal.

This is the effect of the euro. It makes it impossible for deficit countries to make the pain invisible through higher interest rates. Instead, they will face loss of employment and ultimately loss of population to surplus countries. Unemployment is something most people take seriously. There is therefore direct punishment at the polls for bad economic management if you have a common currency.

The great example for this mechanism is Italy. For decades, Italy had bad economic management, a very high government debt and a towering interest rates. Mortgages were virtually unknown. Today, Italy has a relatively high but manageable government debt, interest rates have never been so low and there is now a mortgage market. The introduction of the euro is what made the difference. There's a similar story in Portugal and Spain, but it is harder to show because the exchange rate of the escudo and peseta at introduction was set too low, which had different effects, working in the same direction.

Peter
An unidentified coin is a piece of metal. An identified coin is a piece of history.

chrisild

Quote from: Hardy Strong on November 27, 2009, 01:44:44 PM
My own feeling is that the euro is a monolithic thing, better suited to communist philosophies, whereas I agree with the German (was it Schumacher?) who said that "small is beautiful".

A country can of course choose whether it wants to join the European Union - which the currency union has legally been part of since the EU was founded (Maastricht Treaty) - or whether it prefers to stay out. And a country that leaves the EU will also cease to be part of the currency union.

What will indeed be more difficult, I suppose, is to leave the currency union while continuing to be an EU member. But I guess that is true for every case of a member state attempting to apply the acquis communautaire somewhat selectively. :) Whether a single region, e.g. a French département/région d'outre-mer, could do that I simply don't know. But I find it hard to imagine ...

Christian

Figleaf

Quote from: Hardy Strong on November 27, 2009, 10:27:15 PM
it is possible for even the guardians of the euro to judge things wrongly at times, e.g. interest rates. And there is a host of other factors that affect an economy - not least fashion, when you look at the history of so-called Keynesian and monetarist policies.

Yes, 100% agreed and here is where te euro mechanism provides some of its best protection. In any one country, monetary policy is set by a committee of people (predominantly male) of the same age bracket, having been exposed to the same economic theories in the same (London) school (of Economics) at the same time. They're not stooges, but they do suffer heavily from consensus thinking, when economics is a "science" that's by far not explored to the end. Having a committee coming from different countries with different ways of thinking doesn't mean they'll make no mistakes, but it does mean they all have to think hard and defend their opinions with fact, rather than operate on the shared assumptions of the previous generation of economists.

Quote from: Hardy Strong on November 27, 2009, 10:27:15 PM
Britain before Mrs Thatcher also had a rather inflexible labour market.

It still does, fortunately. Otherwise, London would have been twice as big and the highlands depopulated. Economists love to forget the effects of a flexible labour market on social and geographic conditions. That's why there is a European regional policy, pumping money into poor areas in Britain. One of Britain's larger (and unacknowledged) problems is that it seems unable to develop the economy North of the Midlands. Great for tourists and sheep, but lame for a country that wants to pretend that it is modernizing.

Quote from: Hardy Strong on November 27, 2009, 10:27:15 PM
Let's imagine that, all else being equal, it was possible to join the euro in 1960, and that Britain had done so. Do you think the benefits of a common currency would have meant that Britain could have avoided the harsh medicine of 1979 to 1982, when Mrs Thatcher first came to power and had to restructure the economy? And that we would have sorted out the horrible mess that was the UK in the 1970s, or that in fact we would never have got into that mess in the first place?

Euro and Europe aside, I'd also be interested to know what you think of the approach that Mrs Thatcher took to mending the UK's problems. It was heavily criticised at the time, but did she really have any other option?

There was no euro in 1960. I was a minor and I didn't study the period. I think your question may be condensed to "can you get into or out of an economic mess by using a common currency".

To answer that question, it may be illustrative to take West Germany as an example. The theology of the Bundesbank since the second world war was to have a hard DM. That's great when you are growing (fast). In the period of the "Wirtschaftswunder" it reinforced growth. The problem was the policy didn't change when growth slackened with high inflation (stagflation) or when the world economy suffered one crisis after another (oil going from $4 to $20, Asian crisis, Russian crisis, Latin American debt crisis). The final straw was accepting the Ostmark at 1:1, which was yet another big blow to the "Mittelstand" in the West, the industry in the East and the real estate sector in both and which in the end decelerated growth in the East, making large numbers of Ossies seek work in the West. I think this shows you can get into a mess with a common currency, especially at the point where you are entering into it.

After 1999, German financial policy makers quietly changed their tune, concentrating on getting the Federal budget in hand. The real estate mess was cleared by adapting prices downward (Dutch border dwellers now look to live in Germany, where prices are lower, maybe for the first time in history). The Mittelstand is re-organized, largely by embracing new technologies, including software development. The East is getting in new investments, but it's still lagging. While Germany is not completely out of the woods, its position, in spite of the IT bubble and the credit crisis, is so much stronger than in 1999 that I think you can say you can get out of a mess with a common currency also, if you use the appropriate instruments.

Don't get me wrong. I am not an advocate of the UK entering euroland. I think British popular thinking is still stuck in the thirties (OK, except for page 3 of "The Sun" ;)) and its politicians are far too dependent on the US and unused (even unwilling) to thinking in terms of european communality. However, the mere fact that it's unsuitable to have the UK in doesn't mean the euro is a bad idea.

Peter
An unidentified coin is a piece of metal. An identified coin is a piece of history.

Figleaf

The only part I do know of is pensions policy. BT (Before Thatcher) the UK had a reasonable, though very complicated system with a fixed state pension, a means tested state pension (together called the first pillar) , a company pension (called the second pillar) and voluntary pension purchases (the third pillar).

Mrs. T's dogma called for minimal state pensions and people saving for their own pensions for the rest. She abrogated the means tested part of the first pillar and called on the third pillar to take up the slack. This, they did with great enthusiasm and stupidity. At the time, interest rates were around 10% going down. The expected long term return for gilts was 8%. Therefore, it became usage to offer a guaranteed return of 4% annually. The second pillar, faced with these conditions, followed suit. As the interest went down with inflation, gilts sank to 4%, even 3% and the guarantees became millstones. The third pillar stopped offering guarantees and the second pillar tried to maintain them by over-indulgence in equity. As sponsoring companies found out that the risk and cost of their schemes had significantly increased, without a better pension as a result, they started closing schemes. The second pillar might have disappeared altogether, had it not been for a "solution" coming from the US: DC.

Normally, you pay contributions to a scheme and the scheme makes a pension promise. This is called defined benefit (DB). In DC, you also pay contribution, but you get no promise in return. The money is invested for you, or you get to choose how to invest it and at the end of the ride, you take what's left and buy an annuity. That means you bear the investment risk individually. Moreover, you depend on whatever the "market" interest rate is when you need to buy the annuity: your neighbour may, with the same capital, be able to buy a much higher annuity when interest rates have shot up during the time you bought the annuity and he bought the annuity.

The problem with DC is that it can't work. There is enough research to prove it. Normal people are really very bad investors. Leave them to play against professionals and they lose money hand over fist. BTW, the best investors are people with mental problems who cannot have or grasp emotions. Moreover, people grossly underestimate what they need, to fulfill their wishes and they are mentally unable to do the calculations, because that's how normal people tick. The end result is that DC is at best highly inefficient, at worst a machine to destroy your savings.

As if that is not enough, accountants (a despised life form in the pension world) have made rules to connect the results of the pension fund closely with that of the sponsor. Now, a company like British Airways is a whole lot smaller than the British Airways pension fund, so is British Airways an airline or a financial institution? BA is the rule, not the exception. Again, lots of second pillar funds were forced to close by rule makers.

A number of committees studied the problem (Myners, lord Turner). Of course, the government mandarins had to go scot free, so the blame was laid at the feet of the British public. They were said to be under-saving and financially uneducated (in other words, perfectly human). The latest "solution" is that the flexible part of the first pillar will be re-introduced as "personal accounts". It's too late for a generation or two. Their first pillar pension is a pittance, their second pillar fund is closed if they are lucky, gone if they are not so lucky and they haven't saved enough, if at all, in the third pillar. They trust the savings in their homes, but guess which prices just collapsed and will not see an upswing in a long time? There is a great amount of poverty among the elderly in the pipeline in Britain. The government knows about it, but it is unable to do anything about it because it is politically impossible to turn back the wrong decisions of the past and because the conservatives hold on to their dogma.

I guess the lesson here is that Britain had veered too much to the left BT and too much to the right AT. It's fine to let the market mechanism play when the market works. If it doesn't work (think railroads, or pensions) you need non-dogmatic solutions.

Peter
An unidentified coin is a piece of metal. An identified coin is a piece of history.

chrisild

Quote from: Rupert on December 06, 2009, 01:01:32 AM
So Curacao and Sint Maarten will each be a SEPARATE semi-autonomous entity, and each in theory could its own separate currency? This is already the case with Aruba, of course. Such splintering...
(from the "Which Countries' Coins Are Contra-Aligned?" topic)

Basically all these territories use the US dollar. They do have "local" currency units like the Florin and the Gulden, but those have fixed exchange rates (see further above). If that is what they want, fine - they are autonomous regions within the Kingdom of the Netherlands. Hope that the difference becomes a little easier to see by using the Dutch names ...

That kingdom (Koninkrijk der Nederlanden) currently consists of three parts - Nederland (in Europe), Aruba (near Venezuela), and Nederlandse Antillen (spread across South America/Caribbean Sea). The Neth. Antilles will cease to exist next year, so as from October 2010 there will be four parts: Nederland, Aruba, Curaçao, Sint Maarten. If the latter two want to set up  separate currency systems, that is their business. Basically they will just use the US dollar, whether directly or not I don't know yet.

Now comes the interesting part, currency wise: The remaining three Neth. Antilles islands - Bonaire, Saba, Sint Eustatius - become parts of Nederland, that country in Europe. People there will be able to vote for the Dutch and European parliaments, but apparently the islands will continue to be "dollar focused". Makes sense if much of your money (apart from subsidies) comes from American tourists, but we will then have the funny situation that Nederland will soon use both the euro, in most cities, and the US dollar, in a few cities. :)

Christian

Figleaf

To put that in perspective, the joint population of Bonaire, Saba and Statia is 17 600. That doesn't even amount to one town. Having an income in euros and dollars and expenses in dollars makes sense to me, as long as the US runs a current account deficit.

Peter
An unidentified coin is a piece of metal. An identified coin is a piece of history.

chrisild

Well, I tried to kill two birds with one term. :) In Aruba for example the florin coins and notes do circulate from what I have read; they just have pegged the florin to the US dollar. (And I think that is also what Curaçao plans to do.) Now the three places that are to become parts of Nederland apparently plan to simply use the US dollar instead of the Netherlands Antilles gulden ...

Christian