
Is the Euro the New Dollar? - noor420
http://www.time.com/time/business/article/0,8599,1869159,00.html
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patrickg-zill
My understanding is that 85% of international trade is settled or conducted in
USD.

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.

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dc2k08
China announced on christmas day that it was gearing the yuan to be used as an
international currency as more and more businesses are worried about trading
in the dollar.

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.

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tokenadult
"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."

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."

~~~
jerf
China looks like an absolute economic powerhouse, if you only consider the
factors in its favor.

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.

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tokenadult
"if you only consider the factors in its favor"

What are the factors that are most in favor of China?

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tokenadult
"European Commission President José Manuel Barroso credits the euro for
delivering lower inflation, lower interest rates and greater price stability,
and helping create 16 million jobs."

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.

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tl
Maybe we should add this to the growing list of blog posts on <http://angry-
economist.russnelson.com/> that show where Paul Krugman has been dead wrong in
his area of expertise.

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Shamiq
It's difficult to be correct if your area of expertise is predicting the
future.

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nandemo
I don't know that his job is to predict the future. He's an economist, not a
fortune teller.

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.

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sachinag
Wow, a bunch of comments here and no one's mentioned that oil is traded in
dollars. If oil kicks of a wave of commodities being traded in Euros, then
yes, the Euro will be the new Dollar.

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.

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mdasen
No, it isn't. Definitely not yet. While the dollar's reputation has been
damaged by the Bush years, the dollar made its way through two world wars and
the cold war without the problems that most European currencies faced. As
Warren Buffet says, "It takes 20 years to build a reputation and five minutes
to ruin it." And it's true that while the dollar won't be seen in the pre-Bush
light for a couple decades, it's not as if it's been replaced (yet). The euro
has done well in its 10-year history and has been wonderful for Europe (both
stimulating trade and creating stability - I'm a huge euro supporter), but
it's only existed for 10 years in what has been a relatively safe economic
time. This is the first real test of the euro and we are far from seeing how
it is faring.

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.

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enra
Euro isn't like the "most European currencies" and the past isn't a clear
indication of the future. Wars are much different times than the mess that we
are dealing with now.

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.

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mdasen
Yeah, the euro is being managed quite well.

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.

~~~
laut
Fed having a reputation of avoiding inflation? Are you kidding? Do you know
why Bernanke's nickname is Helicopter Ben?

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talboito
I'd thought the Helicopter Ben nickname was due to his frequent and effective
use of Zangief in Street Fighter II.

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.

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lionhearted
One interesting point is that some individual countries on the euro can't
optimize their currency strategy now. The example I've heard a few times that
makes sense is Italy. When they needed to in the past, they could sink the
value of their currency to stimulate Italian exports. Now, not so much - and
euro stronger than other global countries reduces demand for Italian goods.
It'll be interesting to see how the euro works out when a couple local
economies in Europe are in bad shape and would love to have a stronger or
weaker currency than the rest of the Union.

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eru
Now Italy finally has to cut costs. Perhaps it's better in the longer term for
them.

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zitterbewegung
Wouldn't it be a better idea to court european VC's than american because they
might pay you in euros?

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laut
If you prefer EUR over of USD, you can just buy EUR with the USD you have.

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vaksel
not yet

