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The Guilder and the Euro

by on March 6, 2012

After reading the Lombard Street Research (LSR) and some commentaries, I believe that a currency debate is necessary. Both the Guilder and the Euro have their own advantages and disadvantages. So why not both the Euro and the Guilder?  Using both currencies maybe the solution.

Counter-factual research or research using “comparables” is difficult and always open to debate. We must, therefore, focus on the main arguments and not the exact figures.

Lombard Street Research argues that:

  1. There were fundamental problems with the European Monetary Union (EMU). Instead of enforcing discipline and low inflation on the historically more spendthrift thrifty economies in the South. The narrowing of the rates between the Eurozone economies allowed politicians in Italy, Portugal and Greece and the private sector in Ireland and Spain to go on a spending binge. This has lead to a divergence in labour costs. Historically financial market would have adjusted sooner pushing rates up and depreciating the currencies. Rates have only recently moved, with dramatic consequences. Without the possibility of devaluing the currencies, internal adjustments are needed, yet the politicians seem powerless and the economies (in particular the labour markets) are simply do not seem flexible enough to achieve Hong Kong’s feat during the Asian Crisis.

  2. Dutch financial prudence and modest wage gains, would, historically, allow the Dutch  Guilder to appreciate against most European currencies. A currency appreciation increases the purchasing power of consumers. It may hurt competitiveness of exports, yet it can also spur innovation and productivity gains to keep up with competition.
  3. Sweden and Switzerland have done as well outside the Eurozone as before the advent of the Euro. In comparison the Netherlands has fared less well. We must remember that Sweden went through a housing crisis in the late 90’s and that Switzerland is a unique “safeheaven” economy, which does skew results. Yet living in Switzerland, I can confirm that  modest currency appreciation is not the curse, but drives high added value economic development and innovative activity.

Arguments against and exit Eurozone are that :

  1. The creation of the Eurozone deepened capital markets. The Euro is seen as more liquid ensuring that it is easier to settle trades in this currency.
  2. A single currency also facilitates trade as it reduces the currency risk. It may also enhance travel and labour mobillity with and small transactions across borders.
  3. Transaction costs have been reduces as Eurozone banks need to hold less money balances to effect foreign exchange transactions.
  4. An argument against the return to the Guilder, is that the Guilder will inevitably be pegged (at least initially) to the Euro. This does not necessarily make it more flexible. Yet I feel it is unrealistic that it would not have appreciated against the Euro due to the current imbalances. This would not only have decreased the cost of a Greek bail-out, but also increase purchasing power in The Netherlands.

LSR looks at a policy decision within the current convention of one sovereign currency. Yet currency competition, with both the Guilder and the Euro serving as legal tender could be the solution.  Money is a medium of exchange that facilitates trade, with the advantage of eliminating inefficiencies of barter. Money must serve 5 purposes. It must be affordable (low transaction costs), durable, liquid, portable and store value. Modern electronic banking means that durability and portability are not a real issue. The Euro and Guilder would then compete on liquidity, transaction costs and price stability.

Many might claim, like Ben Bernanke did, that currencies already compete on the Foreign Exchange (FX) market. This is the case, yet the FX market is not complete. What I propose is that wages, taxes and any electronic transaction can be made with both Guilders and Euro against the most recent exchange rate (a  typical account will have X Euros and Y Guilders). This will allow not only those trading on the FX market to choose the most convenient currency, but everybody in the economy to make a decision on what their expectations are and in what currency they wish to be paid and pay with.

  1. naumanjanjua permalink

    You have to admit though that the Lombard Street Research Report is fundamentally flawed in that it makes a lot of assumptions that are questionable. If just one of those assumptions prove not to be correct when we return to the Guilder, the consquences for the economy could be quite disastrous.

    The report also does not discuss the two main factors influencing the economy ever since the Euro was introduced, namely de Housing-Market and the Pensionsystem.

    On the whole the report provides a good retrospect on how we rushed into the euro and the problems that ensued, but the hard evidence for a return to the Guilder remains unconvincing.

  2. I do NOT believe LSR would publish a biased report. Most of the figures are plausible (even though I feel comparisons with other countries are and the time periods chosen may be dangerous). LSR did point out the same fundamental flaws back in 1999. We should remember that LSR has a reputation to maintain. It has far bigger clients than a medium sized Dutch political party.
    I do however recognize the risks that leaving the Euro would bring. The Guilder may be volatile. The report essentially assumes that the world has not changed and that pegging the Guilder against the Euro will be no different than the peg to the D-Mark.
    The best solution would be to allow the Dutch Central Bank to issue the Guilder without getting rid of the Euro. This way we may benefit from the positive effects of the Guilder (which will probably appreciate to the Euro and may have a lower long-run rate of interest) without risking the benefits of the Euro (capital market liquidity and low export transaction costs).

    I do not see why the housing market and pensionfunds have anything to do with this.

  3. naumanjanjua permalink

    A bit late but nevertheless.

    The report itself admits that a euro-exit will severly undercut the pensionfunds, who will see losses in billions of euro`s. The government should supposedly fund these losses, which is pratically impossible for all the reasons known to us.

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