The Euro: Money Change
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MARGARET WARNER: For 300 million Europeans– from grocery shoppers in France to bank tellers in Germany– it was the first workday for their new common currency: The Euro. Consumers across Europe appeared to be taking the changeover in stride. Many made their daily purchases today using the new currency. Others took advantage of the up to two-month grace period when most businesses will accept the old currencies, too, and give change in Euros. As expected, banks and automatic teller machines were busier than usual, with many customers lining up to exchange their old notes for the new pastel Euros with shiny holograms.
WOMAN: I think it’s going to be okay in a couple of days. When you get used to it. But right now, it’s very difficult.
MARGARET WARNER: There were a few glitches.
WOMAN: We do not accept credit cards.
MARGARET WARNER: Tourists and commuters paying in Euros for the first time created long lines at popular attractions in Italy, and caused tollbooths to bog down in Greece. A young Greek woman expressed the ambivalence many Europeans feel about giving up their historic currencies.
WOMAN: So I think it’s best for us because we are a small country and now, it’s, an opportunity to be a part of Europe more with strength, all this. And of course we love drachma. And we are very emotional for letting it go. But I think it’s going to be okay for all of us.
MARGARET WARNER: 12 of the 15 countries that make up the European Union agreed to retire their currencies: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Three EU countries– Britain, Sweden and Denmark– chose not to make the switch for now. The decision to unite Europe with a single currency came ten years ago, when EU leaders signed the Maastricht Treaty in Holland. Three years ago, governments and businesses began using the currency for accounting in electronic transactions. Initially, the Euro was worth about $1.18, but has declined in value to about 90 cents. This week’s January 1 transition to Euro bills and coins amounts to the biggest currency transaction in history.
MAN: You got to have change any money any more, so that will be much easier to live.
MARGARET WARNER: For the nearly $600 billion worth of Euros needed to replace all the national currencies, the European Central Bank printed more than 15 billion Euro banknotes, and minted some 52 billion coins.
MARGARET WARNER: And for more, I’m joined by Klaus Friedrich, chief economist with the Allianz Group and Dresdner Bank, based in Frankfurt, Germany; Gerard Baker, Washington bureau chief for the “Financial Times,” published in London; and Fred Bergsten, an economist and director of the Institute for International Economics in Washington. Welcome, gentlemen. Gerry Baker, this ask a huge undertaking A. It will be as if the U.S. suddenly switched currencies. Are you surprised that it has gone so smoothly?
GERARD BAKER, The Financial Times: No, there has been a lot of preparation for this as you said in your report. The initial treaty that set the, paved the way for this was sign signed ten years ago. For the last three years the Euro has been in existence in a virtual form as a unit of account. This process has been long in train. The surprising thing I think though is whether or not or the important question is whether or not this currency which has been entirely the product of the creation of it has been the product of political elites in Europe – it has not been a popular, there was no popular demand among the people of Europe to get rid of their currencies. In fact, most of the people in Europe when they were first asked about these actually rejected the idea of getting rid of their currencies. There has not been a mass political movement to get rid of their currencies. It’s been an elite, politically driven process, and the surprise to some extent has been that it, there hasn’t been more opposition and more concern about Europeans about giving up as you heard from the young lady from Greece there is concern about the emotional impact of giving up their currency but the surprise is there hasn’t been more concern given that was something most of the people of Europe never wanted.
MARGARET WARNER: What is your take on, Mr. Friedrich. how smoothly it has gone today but also the factors that Mr. Baker brought up, the emotional tie people have to their currency?
KLAUS FRIEDRICH, Allianz Group: I think one need to expect this. I mean the German marc has been a good currency. I think the Euro is going to be a better currency because both currencies have been quite stable. The Euro has brought us internal price stability for three years, and not just to the Germans but also southern Europeans, used to much more inflation, and the Euro despite the fact that it has declined in value in the first one and a half years has been quite stable recently. The last one and a half years the Euro has moved around 90 cents – plus minus 5 percent. That is a fairly good stable performance; the German marc in the past was quite volatile against the dollar mop moving up and down 20 percent, that always was the problem with German exporters so I think the Euro has some things to recommend it. We have prepared for this very, very carefully and I’m very glad that it is going over smoothly now.
MARGARET WARNER: C. Fred Bergsten, what is the theory behind this? Why is Europe doing this?
C. FRED BERGSTEN, Institute for International Economics: I think Europe is doing it for two reasons, one economic and one political. The economic reason is simply to save money and enhance efficiency. Before the Euro, a traveler going across the 15 or 12 European currencies literally had to change his money at every border.
MARGARET WARNER: And lose a little in the process.
C. FRED BERGSTEN: And lose a little and if you went actually from Greece through each of the countries all the way to Ireland you would have lost 50 percent of your money. It’s like if a Washingtonian was going to New York, driving to New York and had to change his D.C. money into Maryland money into Delaware money, New Jersey money into New York money and so on. They’ve gotten rid that have. It hugely reduces cost. The other reason is political. The whole theory of European integration is political not economic. It’s too avoid or indeed eliminate the risk that European countries will ever again go to war. Remember they did it twice in this century with disastrous effects on the rest of the world including the United States. They decided to integrate so deeply in economic terms that they literally could never again go to war. And the single the currency by linking the countries financially is in a way the capstone of that effort. It’s a deeply political strategic objective that overrides all the economics but the economics make sense too.
MARGARET WARNER: Mr. Baker let’s look more at the economics because the argument was it would make Europe more competitive both the countries and the companies, other than not losing these conversion transaction costs why else does that common currency make companies and countries more competitive?
GERARD BAKER: They could make that. In some respect the Euro since it has been in existence as a virtual currency has been helping in some respect — particularly in financial market. It has been able to, it has been easier for governments for example to raise money and governments that had difficulty that used to have to pay a higher rate of interest to borrow money they’ve been able to do so at a lower rate because they are area part of one currency. But the, the economics, Fred is right the economics have always been a relatively small part of. To be honest the transaction costs have been significant but they are declining as more and more people use electronic forms of money. In any case, this has been from the first instant a political project, a project designed by the leaders of Europe to push European countries, the European peoples closer together in effect to eliminate they hope national barriers, to create a single United States of Europe. That is the goal of most of those leaders in continental Europe. The problem is there isn’t the popular support to do that. And if you force countries by such an important step as creating a single currency, if you force people in a single unit when people don’t, French people feel their first allegiance is to France, and Germans still feel their first allegiance is to Germany, if you try and create a national European identity when it doesn’t exist, you are asking for trouble. And I think that’s what the Europeans are doing.
MARGARET WARNER: Do you want to take up that argument or shall I ask you a little bit more, Mr. Friedrich, about the economic argument here? Is it part of the theory too for instance it will be a lot easier for people to compare prices, both businesses and consumers, that you will force greater competition because of that?
KLAUS FRIEDRICH: For that certainly one and one major. The transparency, you can do direct price comparison between Barcelona and other areas. This is, it’s a minor thing. The basic economic argument is size — economies of scale. Part of the fact that the United States is such a powerful economy is that it is very large. It is a very large market. Largeness means you can specialize, largeness means you can be efficient.
MARGARET WARNER: Are you talking about maybe a company that operates in several countries?
KLAUS FRIEDRICH: A company, the company has to do one thing regardless of where it operates T. Has to be competitive by international standards not just in Europe but also in the world. That in the past these companies in part were protected by their own national protectionism. This is all gone. The Euro is only sort of the last consummation of the internal European market. This is a very powerful economic agenda. As far as the argument anybody is being forced, I say these are democratic countries. Nobody has been forced into anything. The Germans have been quite skeptical but they are duly elected representatives and their parliament voted for this Euro without exception and so I don’t you know, I don’t sense right now on the streets of Germany that there is anybody who is feeling forced into anything.
MARGARET WARNER: Fred Bergsten, to what disagree grow does this limit individual countries’ sovereignty, though, or their ability to respond to their local economic conditions when they are going to have and Europe has for the last three years one European Central Bank setting interest rates.
C. FRED BERGSTEN: There is a big self-denial of economic policy tools by the country that is joined the Euro. They no longer have a national monetary policy. They can’t change interest rates at the national level or change the money supply.
MARGARET WARNER: Or devalue the currency.
C. FRED BERGSTEN: They cannot change the value of the currency any more. Those major policy tools and attributes of sovereignty are gone, and that can cause problems.
MARGARET WARNER: What kinds of problems?
C. FRED BERGSTEN: In the recent past already different members of the Euro zone are proceeding at different speeds. Ireland and Portugal having grow be rapidly and have wanted a tight monetary policy higher rates to dampen their growth and limit of risk of inflation, Germany and Italy have been growing slowly — maybe 1percent a year. They wanted an expansionary monetary policy in order to promote more rapid growth. No longer can those individual countries do it. They have to work out a compromise for the benefit of the unit as a whole. Now, I hasten to say the individual countries have lots of other tools; they still have fiscal policy and their budgets at the natural level, though even there some constraints were agreed at the European level, they have structural policies to change their labor markets, to make them more flexible, to change the capital markets to make them more efficient. And, indeed, part of the theory of the Euro is that the self-denial of some of the traditional policies, monetary policy, exchange rate policy will lead the countries to improve their other policies make their labor markets more flexible — deepen and strengthen their capital markets so some of the instrumental problems that have undermined Europe’s credibility will, in fact, be improved as a result of the Euro. That is a more contentious issue. We frankly haven’t seen it happen yet, but I think over time it will happen as a result of the dynamics of the European integration process.
MARGARET WARNER: Do you think it’s going to happen?
KLAUS FRIEDRICH: I think you see it happening already.
MARGARET WARNER: Give me an example?
KLAUS FRIEDRICH: Oh, my industry is banking industry. There is a tremendous movement of rationalization in the European banking industry because banks can no longer hide between the national currencies. The German banks made a lot of being money the monopolist managers of the d-mark. This is gone. Right now, competition from London is fierce and I can tell you, out of experience that this is really cleaning up in the European banking industry. That is one example. There are many other examples. I think the next big one is going to be European agriculture.
GERARD BAKER: But we were told that the introduction of the Euro would result in the elimination or certainly the dismantling of so many of the instrumental rigidities that exist in the European economy.
MARGARET WARNER: Explain that.
GERARD BAKER: Labor markets, the most serious example — if you have a single currency area the United States is a single currency area, which in some ways has the same characteristics as Europe. California, the California economy is really significantly different from the Massachusetts economy or from the southern economies. There is a, it is a broad area in similar ways to the European area. When you have in the United States is much greater flexibility for example in labor marks. You don’t have labor mobility in Europe. What you also do have in Europe unfortunately are very rigid despite what has been said you do have rigid rules about how companies can treat their employees, for example. It’s very hard to fire employees in many European countries. They don’t have the flexibility, the freedom that companies need to have in a globalized economy. They don’t have the freedom that they need to have to be able to make that economy work. That is, we were told the Euro would eliminate those structural rigidities. In fact, we see –
MARGARET WARNER: You mean countries as Fred Bergsten suggested be forced to go the route to remain competitive.
GERARD BAKER: That hasn’t happened. We have had the Euro as I say in effect for three years, today, this week rather was the launch of the notes and coins but the Euro as an economic much unit has been around for the last three years. And countries actually that were supposedly committed to making structural reforms to the labor markets so make it easier for employees — for employers to lay off workers if they needed to, those countries are backing off those reforms, it’s not happening.
MARGARET WARNER: Before we end, Fred Bergsten is this something the United States should be welcoming or be worried about or neither?
C. FRED BERGSTEN: I think it’s a good thing for the United States. It’s a shame more Americans are not aware of it so I’m glad you are doing this program. Back to the political objective, the United States has had to go to Europe twice in the last century, lost a lot of people, spent and wasted a lot of money because of fratricidal wars in Europe. If this could eliminate that, it’s a huge gain to the United States but even on the economics it’s a huge gain to us. It will improve efficiency in Europe. I think it will ultimately lead to the structural reform, make for a stronger European economy. A strong Europe is going for the United States. They buy more from us, our investments return more there. It’s a good thing for us. The big issue that gets raised is whether the Euro will become a challenger to the dollar as the dominant global currency. I think it will over time and I think too is a good thing, because competition for the dollar will make sure we keep our house in order. We and the Europeans will have to work out ways to manage the global monetary system on a cooperative basis, but I think it’s high time we try to do this, the Euro area is just as big in economic terms as the United States. And the world economy will be better off with two people at the core rather than just one.
MARGARET WARNER: All right. And on that optimistic note we have to end this thank you all three.