Last Friday, the European Central Bank began distributing euro coins to the public. The euro has been available for bank transactions and on foreign exchange markets since early 1999. But local currencies have continued for cash purchases. Next year, people will need to use euro notes and coins for goods and services in 12 different countries.
On Jan. 1, virtually all existing European currencies will start to disappear for good -- no more French francs, Italian lira or German marks, among others. By Feb. 28, the euro will be the only currency accepted at banks, shops and businesses throughout most of Europe, and will denominate all prices. National currencies unconverted by March 1 will become worthless.
It was originally thought that the euro would displace, or least challenge, the dollar's supremacy as the currency of choice in international business. But that has not happened. The euro has fallen more or less steadily against the dollar. Initially, one euro was worth $1.19; today, just 89 cents.
The distinguished monetary economist Anna Schwartz is skeptical that the euro will ever fulfill its promise. She notes that new currencies normally are introduced after political union. But in this case, a common currency is being introduced before the nations of Europe have joined together into a unified state. Indeed, one of the stated purposes for replacing national currencies with the euro is precisely to hasten the move toward political union.
Schwartz is very dubious about whether this will work. "There is no evidence that the economic advantage to a holder of conducting transactions with a currency issued by a country other than his own ... has political implications," she writes in The Region, a publication of the Federal Reserve Bank of Minneapolis. "Why then should one expect that the use of euros by a German or French resident would somehow enlarge their sympathies for the other?" she asks.
Schwartz is also concerned about the economic implications of the euro. The euro zone has economic output about equal to that of the United States. But simply forcing people within it to use a single currency will not make people elsewhere want to use it in international transactions if the euro's value is undependable. So far, it has failed to demonstrate that it can be used as a secure store of value, unit of account or medium of exchange, in Schwartz's view. Until it does so, the dollar will continue to be the world's dominant currency.
This is not to say that the Europeans are not doing what they can to encourage worldwide use of the euro. One way they are going about this is by printing 500-euro notes in order to make large cash transactions easier. Many critics have accused Europe of, in effect, going after the drug- and money-laundering business with this action. Since the largest dollar denomination available is the $100 bill, it is very bulky for large cash transactions. The equivalent amount of euros would take up one-fifth the space in a briefcase.
But while the Europeans may be encouraging illegal transactions in one respect, the conversion is wreaking havoc on the underground economy in another. People with hoarded cash, such as those trying to hide income from tax collectors, must now use it or lose it. If they try to exchange unusually large quantities of local currency for euros next year, the tax authorities may ask embarrassing questions about where the money came from.
To avoid potential tax problems, many people are spending their undocumented cash as fast as they can. Cash transactions are up throughout Europe, as people rush to buy jewelry, paintings, luxury cars and even houses with underground cash. Others are trying desperately to get their cash out of the country and convert it to pounds, dollars or Swiss francs.
Criminals are preparing, too, for the debut of the euro. Because massive amounts of cash will have to be moved throughout Europe very quickly, opportunities for theft will increase. Also, because euro notes are not yet well known to bank tellers and shopkeepers, it will be easier to pass counterfeit euros. And those holding counterfeit lira, francs and marks have only a few more weeks to dispose of them before they become totally worthless.
In the near term, the euro conversion is likely to slow growth and inflation in Europe, as the supply of underground cash dries up. The euro may temporarily strengthen against the dollar. But whether the euro ever becomes a serious challenger to the dollar, only time will tell.