Euro–told you so

A little over a year ago, the statists in western Europe breathed life into the Euro, a super-national currency that wrested the control of monetary policy from member nations.

Every business and economics writer in the world was gushing with enthusiasm over the idea…every one except me, that is.

Way out here in Saipan, a zillion miles away from Europe’s decay and from New York’s financial nerve center, with nary a currency trader to talk to…how could my lonely voice have been right when the rest of the world was wrong?

That’s easy. I merely looked at the basic economics of the deal.

The Euro’s “popularity” at the launch was based on what I call the businessman mentality. Every grubby merchant in Europe was happy at the prospect of a super-regional currency removing the transactions costs of having to convert one currency into another one as goods crossed borders. Fair enough. The deadweight of “transaction costs” had been removed.

But so what? Transaction costs aren’t the only element in markets, be they currency markets or any other kinds.

Transaction costs are visible, though, and easy to understand, so the merchant types could get excited about that. But running a butcher shop or an inn is not the same thing as understanding the economics of monetary theory.

And such economics butchered the Euro in short order, as I predicted. When the Euro was launched in January of 1999, it was worth about $1.17 U.S. The Euro has since fallen to 92 cents–and it’s still falling. Against the dollar, then, that’s a whopping 21 percent fall in just one and a quarter years.

Pretty soon, there is going to be some semi-panic in Euro land as the weenines who make policy realize that their precious Euro has fallen like third world scrip and the world is laughing.

Now for phase two of Europe’s super-national economic farce. They will probably try to raise interest rates in order to prop up the value of the Euro. Doing so, of course, will increase the costs of doing business (i.e. of borrowing money), and will only exacerbate Europe’s nasty unemployment problems.

Ah ha, so there’s a bit of a trade off here in monetary matters, where propping up the value of a currency has some distinct drawbacks. They’re going to have quite a scrap over this one, I imagine. These guys are bombing McDonald’s because its mere presence upsets them in France…can you imagine all these smelly creeps trying to iron out the sticky nuances of monetary policy when they can’t even comprehend the Big Mac?

Screw the French. You can’t even get Velveeta or Cheese Whiz from those barbarians.

Meanwhile, they’re feasting on financial headlines that are screaming “Euro falls to low against dollar.”

The Euro-circus points out yet again how lucky we are in the Commonwealth to be tied to the U.S. dollar. A solid economy requires (amongst other things) a reliable currency. That much we’ve got. And our McDonald’s are safe and sound…and a Big Mac with fries and coke can be had for just 4.89 Euros.