January 6, 2002

Eurozone is our comfort zone

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In all cases the introduction of the new currency has been political with the promoters showing a keen understanding of the propaganda and public relations connected with a strong, unified and instantly recognisable currency.

The first monetary union was set up by Alexander the Great and stretched from Greece and Egypt in the west to India in the east. Alexander realised that successful empires could only be maintained by providing a strong single currency that traders, merchants and ordinary folk respected.

His conquests can be traced on a map of the gold and silver mines of the ancient world. At the height of his powers the mines of Macedonia, Asia Minor, Egypt and Sudan were churning out gold and silver.

These were circulated throughout the empire. He paid his soldiers, scientists and architects well and insisted that all old debts were to be redeemed with new Greek coins. Very quickly the coins became the common currency and trade flourished. A great arc of 80 new cities and towns sprouted up from Egypt through the Middle East to Iran (Persia) and on to India.

Trade and commerce inspired an unprecedented movement of peoples around the empire, with Greeks, Egyptians, Jews and Persians living cheek-by-jowl in new towns. The common currency and the increase in trade prompted most of the conquered peoples to buy into and identify with the ancient Greek empire. Alexander’s single currency lasted for 150 years, until the Greeks were finally defeated by the Romans in 197BC.

The Romans had been using their own currency for a few centuries before, but not to the same extent as the conquered Greeks. Yet many of the words we now associate with money are Roman rather than Greek.

Unlike the Greeks, who were more frugal and used currency for political and unifying ends, the Romans became obsessed with cash, inspiring jealousy and contempt. They flaunted their cash, and initially kept their currency out of the hands of their vanquished neighbours. This only heightened resentment, and possibly explains some of the more gruesome punishments meted out to defeated Roman leaders by their foes.

For example, Julius Caesar’s patron, Crassus — widely known for his wealth and love of money — was captured by the Parthians in 53BC. Instead of the usual crucifixion or beheading, the Parthians expressed their disdain for the money-mad culture he represented by pouring molten gold down his throat.

Eventually the Romans copped on to the unifying power of currency and circulated their coins widely throughout the empire. However, when the Roman Empire was at its height, stretching from Scotland to Syria and beyond, the Romans began to run out of gold and silver. By Augustus’s reign, demand for currency far outstripped supply. The Romans faced a monetary dilemma that has been faced by almost every nation since and goes to the heart of monetary economics: what happens when you run out of your monetary base? In Ireland’s case in 1992 it was a shortage of foreign reserves.

Traditionally, when faced with this dilemma a country can do one of three things. First, it can try to live with an insufficient quantity of money in circulation. This is done usually at the behest of central bankers who are still somewhat perplexingly attached to strong currencies at all costs.

As a result the currency will remain strong but there will not be enough demand to satisfy the supply of goods in the country, and prices fall progressively. A country experiences massive deflation, unemployment and political unrest. This is what the world tried to do in the 1930s as a result of its obsession with the gold standard.

Such monetary masochism resulted in the great depression. Argentina tried that for the past three years with predictable consequences. In Buenos Aires, the strict one-for-one dollar/peso currency board arrangement implied that the fewer the dollars at the central bank, the less money circulated. By implication, as foreigners pulled their money out of Argentina the number of pesos in circulation fell. Ireland had a similar fiasco with the currency crisis of 1992.

In the past a second option for countries was to import gold — either by trade or by war. This prompted the discovery of the Americas, the colonisation of South Africa and many other minor adventures. It also accounts for the modern prosperity of the great exporting nations such as Japan, Germany and Switzerland.

A third option is to debase your currency and try to fool people. Historically, this involved changing the metals in your currency. If there was a shortage of gold and silver, then cheaper nickel or copper were used in the coins. The Emperor Nero was a great man for this carry-on, as was Henry VIII of England, who earned himself the title of ‘the great debaser’. In modern times the equivalent of debasing is the central bank printing money.

All hyperinflation periods are sparked by such an approach — most notably in Latin America and Russia in the 1980s and 1990s. Ireland also tried this trick by borrowing heavily in the late 1970s and 1980s and swapping the borrowed cash into pounds, generating the illusion of prosperity for a few years. But, of course, this was followed by a long and painful payback time.

Of the three options, the second is the most lasting, but until recently has been the most difficult to achieve. Either you had to beat up your neighbour and rob his money or you became progressively more competitive.

There is now another way of expanding your monetary base without war or trade, and Ireland may have just stumbled upon it. Joining a monetary union, particularly when you are the small country and have everything to gain, does the trick. Ireland has successfully played this card by joining the euro, and it means that we can import German money without having to invade Prussia or incur a trade surplus with Bavaria.

Of course, we are now paying for being too profligate with imported money in the bubble years, and the nonsensical price of houses (though falling) reflects this. But in general, the main monetary dilemma for a small country has been solved. With the euro we will never — unlike the ancient Romans or modern Argentinians, Brazilians and Russians — run out of money. Even Britain ran out of money temporarily in 1992, as evidenced by interest rates as high as 15 per cent even though the economy was in recession.

Other people’s money is the main reason to be cheerful regarding the euro. It’s not a universal panacea, and logically Irish asset prices cannot deviate from the EU norm for too long, but countries have gone to war for smaller economic prizes than EMU.

In the long term we should never again have currency crisis interest rates, nor liquidity shortages of any manifest kind. Things would be close to perfect if we were totally integrated with the EU cycle, but this will not happen; our business cycle will always be slightly out of synch, and that is our Achilles’ heel. Yet we have solved our main monetary problems up to a point.

So where’s the snag? As has been the case since the Greek Empire’s monetary union, sound money and lots of it is part of a greater political bribe. Do you think Alexander the Great would have given out gold without first obtaining political allegiance of the Egyptians, Syrians or Persians?