Q&A Friday #56: How Does The Rise Of The Euro Effect The American Economy?

05 Jan, 2007 by John Hawkins

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Question: “There have been a number of articles about the rise of the Euro as a world reserve currency. Of course, Iraq and Venezuela have said they will now expect payment in euros. But apparantly other nations have begun to diversify into euro holdings, as well. How do you see this affecting the dollar, and the American economy?” — CoolCzech

Answer: As an answer to that, let me quote to you from my interview with the late, great Milton Friedman:

John Hawkins: If the euro were to replace the dollar as the medium of exchange, if everyone bought and sold their goods in euros instead of dollars, would that have an impact on the US economy?

Milton Friedman: The success of the United States will depend on how much it can produce at home, how much it can sell abroad, what it buys from abroad. It’s of less importance whether it is denominated in dollars or euros.

John Hawkins: So in the end, that is really not going to make a big difference one way or the other…

Milton Friedman: That’s not going to make a great deal of difference. What’s going to make the difference is the productivity of the different countries. But personally, as I say, I believe the Euroland is going to run into big difficulties. That’s because the different countries have different languages, limited mobility among them, and they’re effected differently by external events.

Right now for example, Ireland and Spain are doing very well, but on the other hand Germany and France are doing very poorly. The question is; “Is the same monetary policy appropriate for all of them?” Germany and France on one hand and Ireland and Spain on the other: it’s very dubious that it is. That’s why you’re having increasing difficulties within the Euroland group. As you probably know Sweden, which had not joined the European Monetary Union, voted down doing so and will keep its own currency.