My questioner looked puzzled at first–and then, suddenly, relieved. That was when the real importance of what I had just said began to dawn on me. With an exchange rate this close to the 1:1 mark, we are–quite inadvertently–getting close to a very significant event in the annals of world finance.
Economists have long dreamed about a world operating on the basis of one currency. The efficiency gains may be tremendous. And, as a sequel to the euro project, some have even come up with a name for this mythical world currency: the “globo.” What few of us realize is just how close we currently are to realizing this vision–at least in Europe and America. Even better, what gets us there is a sheer stroke of mathematical luck.
All of a sudden we are faced with a situation where an economic area covering more than 35 percent of world GDP is within striking range of 1:1 parity. I am not advocating fixed exchange rates. And neither do I want to make light of the nervousness currently in the foreign-exchange markets. Contrary to earlier expectations, the euro has declined quite significantly in recent weeks. At around $1.03, it is now hovering near the lowest point ever against the dollar.
And yet this 12 percent decline–to a point where the euro and the dollar basically move around the 1:1 mark–also has benefits. For starters, it should give a tremendous boost to the attractiveness of European capital markets. U.S. investors, in particular, have shown an increasing appetite for investing beyond their nation’s borders. Europe’s capital markets, in turn, are still considered to be quite underdeveloped in a number of vital areas, such as corporate bonds. The main problem is to market these products to the appropriate target audience. With a euro-dollar exchange rate around 1:1, this task becomes markedly easier. Rather than having to run complicated calculations, U.S. online investors can size up their European portfolio in a flash.
The impact of this phenomenon goes beyond the financial markets. To see why, think of what it means for the summer travel season. The biggest challenge for tourists traveling abroad is to do on-the-spot mental math–a cumbersome process whether one is pricing a pair of shoes or assessing that enticing restaurant at the beach. Now imagine having to recalculate prices in terms of home currency not just while on vacation, but while at home. That will be the situation when the euro is finally introduced as a cash currency in Europe in the first half of 2002. Mental math will become a daily domestic chore for all 292 million Europeans in the euro zone. Consider a few of the calculations: The French will have to multiply euro prices by 6.55957 to arrive at the same sum in francs. For Dutch citizens accustomed to dealing in guilder, the required multiplier will be 2.20371. Only the Germans are rather fortunate in having a multiplier of nearly 2 (at 1.95583 Deutsche marks to the euro).
There has to be a better way to market a new currency. And, in fact, the millions of American tourists traveling through Europe this summer are showing us what it is. Given the near 1:1 parity, these visitors are, in effect, finding a dollar price tag hanging on every item on the Continent, give or take a few cents. Americans are thus finding themselves virtually at home–monetarily speaking–all over the 11 countries of Euroland.
Meanwhile, the millions of Europeans traveling to the United States are getting a glimpse of Europe’s future. Instead of waiting for 2002 to roll around in Europe, they’re experiencing right now what it’s like to use a cash currency worth about the same as a euro. Against this backdrop, one can only suggest the European Commission consider creating an official project under the banner MEET THE EURO IN ACTION–GO TO THE U.S.A.! It should encourage European citizens to contemplate a vacation in the United States this summer. Monetarily, at least, it would be as if they were traveling through Euroland in four years’ time. They would also be helping to alleviate America’s trade-deficit problems, which a weak euro of course exacerbates. Considering that almost 10 million Europeans visit the United States each year, we have quite a head start in this remarkable training program.
So is a weak euro a good thing? Hardly. A stable world financial system requires both a strong dollar and a strong euro. But nothing is so bad that it does not have good sides. And at its current level, the new currency clearly has something to teach us.
