Globalist Analysis

World Currency Unity Has Arrived!

Was the introduction of the euro the start of a shift toward a single world currency?

Euros Equal Dollars — Can you believe it?

Takeaways


A world currency is not a new idea. On the contrary, for most of economic history, the world had just one currency — precious metals. To be sure, different countries minted their own coins.

But you could always use your doubloons, florins or ducats in any country of the world — once the merchant ascertained the quantity of gold or silver it contained.

In contrast, national currencies date back only to the invention of paper money. Paper money is notional, of course. It has no intrinsic worth except for the arbitrary decision by the government that this 15 square-inch piece of paper is worth $1 — and another $100.

Governments derive huge benefits from printing money, called seigniorage — because they get to sell those pieces of paper for $1 or $100. So, they naturally want to enforce the use of their money on their territory.

Well, as it turns out, the onset of the new millennium brought a profound revolution: The period of various currencies — and the headaches associated with converting prices from dollars to drachmas or from D-marks to Finnish markka — is over.

Of course, the world is not about to shift to a single currency. But the shift to the euro at the start of 2002 was a huge step in that direction.

When the euro was first established as a unit of account in 1999, it was equal roughly 1.15 US dollars. And it promptly moved higher, to 1.26. Then, the dollar went on a three-year-long ascent. In the early months of 2002, it traded as high as 85 cents per euro.

However, by the start of the 2002 summer vacation season the greenback fell precipitously, trading very close to $1 per euro at the end of June.

This makes life very convenient for Americans planning to spend this summer in Europe — or for Europeans vacationing on the other side of the pond. They don't have to convert any prices—just use dollars as a proxy for the euro and vice versa.

This added convenience in travelling—not just in the 12 member states of the eurozone, but on the other side of the Atlantic as well — may finally reconcile the Europeans to the new currency. And it may silence any remaining grumbling about the loss of the cherished franc and lira.

In the past, some parities between different currencies failed to hold. For example, the Russian government instituted currency reform at the start of 1998, when the Russian ruble was fixed at 6 rubles per dollar.

That happened to equal the number of French francs per dollar, so that one ruble became effectively equivalent to one French franc. The rich New Russians vacationing in their brand-new villas on the French Riviera no longer had to worry about comparison shopping.

Alas, the good life didn't last long. The ruble tumbled after only eight months, promptly reaching 15 rubles per dollar — or 2.5 rubles per franc.

The euro-dollar exchange rate, however, is far more stable. True, the two currencies will go up and down in relation to one another. But they will probably fluctuate within only a 10% range around their parity.

That merely means that when the dollar stands a few percent higher, U.S. tourists will be happy in Europe. And when it is the euro's turn to be stronger, the Europeans will come home from the United States laden with cheaper goods.

Western Europe and the United States comprise about 500 million of the world's richest consumers. Their economies account for more than two-thirds of world GDP. The emergence of euro-dollar parity effectively constitutes the emergence of a world currency.

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