Is the Euro the New Dollar?
time.com
time.com
If the Euro is on track to replace the US Dollar, then surely there are stats showing that use of the Euro to conduct international trade is growing, in areas where USD was formerly used.
Since this is after all Time, it is no surprise that no such stats are quoted and instead we get News McNuggets.
There is also evidence that China is moving away from its reliance on exports for economic growths towards a more consumer driven economic model by setting up distribution centres in rural areas and offering subsidies to rural households for the purchase of household appliances and other goods. They are though also strengthening trade relations in emerging markets.
A number of Gulf Arab states will maintain their 2010 deadline for a single currency, the secretary-general of the Gulf Cooperation Council also announced recently.
This all means that yes, the dollar is being put to sleep and 2009 will be a disaster year for it and the American economy, but it does not mean the Euro will replace it. The Yuan will become the currency for trade with China and the GCC will be seeking to promote their own single currency.
That will be problematic for China.
http://www.nytimes.com/2009/01/01/business/01exports.html
"But shifting toward a greater reliance on domestic demand is not easy. Chinese households have one of the world’s highest savings rates because the country’s social safety net is in tatters, with families receiving scant government help with education costs, medical care and retirement; the average hospital stay costs the equivalent of two years’ wages for the average Chinese worker."
The US looks like a global giant headed for complete irrelevancy, if you only consider the factors against it.
This has rather more to do with the selection bias than reality, though. The truth is much harder to ascertain, and while it's pretty obvious that it lies "somewhere between", that's not saying much either.
What are the factors that are most in favor of China?
Krugman, in an article from the 1990s in Slate cited recently here on HN, expressed the opinion that the Euro would reduce employment growth in Europe, which didn't seem very plausible to me.
Of course, science can help us to "predict the future", in the sense that we know the sun will rise tomorrow and so on. But economics is not a natural or experimental science. Surely it can help you make reasonable predictions, but the nature of methodologically correct economic predictions -- meaning not necessarily predictions that turn out to be right, but ones you can reasonably make -- is much different from those of physics.
Therefore, Krugman and other economics and financial pundits should rather refrain from making unsupported predictions. I think they get away with it because most people don't understand economics and also due to selection bias, as most of us pay attention only to the ones that turn out to be right.
A very good point. I like the definition of "expertise" championed by K. Anders Ericsson, a researcher on expertise and how it develops. He defines expertise as RELIABLY superior performance to a degree that makes the performer a statistical outlier. In one of his studies, he discovered that there is no such thing as expertise in choosing common stocks in which to invest.
People in glass houses shouldn't throw stones :)
That's not to say that what he has to say is wrong, but it's a bit odd to attach the 'economist' label when I'm not sure he has really earned it any more than many of us with an interest in the field and a bit of reading under our belts.
At the end of the day, the dominant currency is the one most people use. In 1900, the language of international relations (and trade) was French.
Exchange rates aren't a good way of measuring a currency, even though they would seem like one. The fact is that currency valuations are usually tied to the interest rates you can earn in banks of that currency. The ECB (European Central Bank) has always kept interest rates high. That encourages people to change dollars into euros and deposit them in European banks which drives up the price of the euro in foreign exchange markets. However, high interest rates also discourage the investment in businesses that drives an economy. So, one can't say that the euro's strength benefits its people.
And that's what you need to do: to look at how a currency is serving the people under it. The Federal Reserve has proven over decades that it can effectively fight both booms and recessions. In a recession, one needs to expand the money supply. That makes it easier for borrowing and therefore investing and spending - exactly what we're seeing missing from our current situation. People have stopped borrowing, investing, and spending because of the high cost of it (compared to boom times) and so by making it easier to do those things we can mitigate some of the pain of the recession and make the whole recession shorter as we more quickly encourage business to return to normal.*
The ECB has lowered interest rates, but the ECB's policy has always been to target inflation and not mitigate recession. Partly this comes from differences between Europe and America. Europe has had many currencies in the past that just free-fell. Inflation was terrible, currency unstable, etc. Likewise, governments have large social programs in Europe and high unemployment is seen as a way of life rather than a disaster. For example, in Germany 8% unemployment is amazing. In the US, we call for politicians' heads when it hits that level. But European countries are more capable of handling such unemployment without huge upheaval because the social programs keep people at bay and without as much worry about a paycheck.
*This is the consensus of mainstream economics in the same way that the existence of global warming is the consensus of mainstream climate scientists. Yes, you can always find those who will disagree with anything.
Also since the Fed's interest rate is zero for all practical purposes how do you suppose it can do much more to increase the money supply? They have over used their main tool and kept rates too low for two long which created over investment in the housing market and caused this pickle to begin with.
I also agree on the ECB goals that controlling inflation and stability is much more important than controlling booms and recessions. It is not even that much possible to do that with euro since countries economies are not similar or fully synched. Extensive monetary control could lead to big asynchronous problems.
I agree that we have to see how well euro will do in the future.
In terms of recession vs. inflation control, most central banks don't see recessions as their domain at all. The ECB wades into it more than probably any except the Fed and it's probably a good thing. Most people hate the idea of manipulating money to deal with recessions and booms - heck, it pisses me off. It's not a good situation - it's often like picking political candidates; you choose the lesser evil.
What people worry about with recession targeting is that it will cause inflation. It can and many countries have shown very bad results with it. The problem occurs because, as you expand the supply of money, each individual unit is worth less of the pie. That's ok for a short while. The problem that most countries get into is that they don't stop it when things get better or that there's a perception that they won't stop it when things get better.
While the Fed plays a little looser than I would like, they've shown that they can effectively target recessions without causing inflationary problems by having long-term discipline. And people accept that it won't happen because of the Fed's history of it not happening. The ECB, while young, enjoys a good reputation and that's why they felt that they could continue to push rates down to target the recession (although not as strongly as the Fed has). They know that people accept that they have a good long-term monetary policy that won't just continually expand the money supply as many countries have.
In terms of economies not fully synched, I don't fully see it. I mean, the economy of Massachusetts isn't going to move lockstep with the economy of Michigan. They're incredibly different - probably more different than, say, the economies of Germany and France. What makes the economies of different countries different? Differences in workforce, differences in natural resources, differences in industries. . . All of those vary regionally in the US. Iowa and Nebraska's farming economy aren't anything like Massachusetts' biotech economy. And, what we're seeing right now is that Europe is affected as a unit by this recession (or as much as ever happens). You can always make the case that you can subdivide something to be more accurate, but for practical purposes coming together works well. Do you think Europe is more diverse than the US in this way? That's serious because I could be overlooking something big that's just not on my mind after being up until 4am last night.
The euro has been one of the greatest things to happen to Europe. It's not mismanaged and has a bright future, but it's premature to say that it's the new dollar. That would be like saying Linux is going to replace Windows on people's desktops. It might happen. Linux is good. It's gaining favor every day. It might be better. However, it will still be a good while before Windows is displaced if it ever is and it's premature to assume it will be.
The Fed's focus over the last 25 yearsish has been on controlling inflation.
Its focus over the last 8-15 months has been easy moneying away from a massive deflationary spiral. I'll take a ride on that helicopter.
And the ECB has been following this. It's actually even in the ECB charter Article 105(1) - (paraphrased by the ECB website [2]) - "Without prejudice to the objective of price stability", the Eurosystem will also "support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community". These include a "high level of employment" and "sustainable and non-inflationary growth".
On the other hand, the Federal Reserve doesn't have a charter explicitly stating price stability as the foremost goal. In fact the 1978 Humphrey-Hawkins Act basically legislates dual goals - full employment and price stability - which could be seen as conflicting (in the context of monetary policy). [3]
In any case, the Fed has a lot of discretion regarding their policy direction, whereas the ECB's charter is more or less unambiguous.
[1] Mishkin's paper - What Should Central Banks Do? http://research.stlouisfed.org/publications/review/00/11/001...
[2] ECB Websit talking about the "Objective of Monetary Policy" - http://www.ecb.int/mopo/intro/html/objective.en.html
[3] Discussion about the goals of US monetary policy - http://www.frbsf.org/econrsrch/wklyltr/wklyltr99/el99-04.htm...
With Euro there is a large psychological and political component. It is hard to estimate indirect effects on Europe's economy (500M people, combined GDP higher than US).
If you can get Europe to feel and act more as one unit, the effects could be huge, possibly dwarfing effects from differences in maneuvering space for monetary policies.