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The Euro's affect on countries' desire to manage defecits.

  1. Nov 18, 2005 #1
    In the U.S.A., we hear commonly that defecits are bad for America because they end up devaluing American currency. Or at least, that's been my impression. What I've been lead to believe is that when a government is running a huge defecit, the government's currency is seen as less stable, and people would prefer to own more stable currencies. As demand for a specific currency drops, so does its price relative to other currencies. Is that about right?

    Assuming that this is right, I've got a question about European nations using the Euro.

    I know the U.K. still uses the Pound frequently, but I'm not sure which other nations have more fully converted to the Euro, and which nations have largely kept their own currency. I'm not even sure if there are nations which have fully converted to the Euro or not, so if someone could tell me that, I'd be very appreciative.

    First part of the question:
    When European nations sell bonds, how are they paid back? Is it in Euros, the nation's own currency, whichever currency is more convenient for said nation to use, or does it differ from nation to nation?

    Second part of the question:
    Let's say you've got a European nation that uses the Euro exclusively. If that nation has an uncontrollable defecit, what incentive would they have to curb it? Presuming the majority of Europe is doing well, and that the Euro will keep its high value, what does a defecit mean to a nation that is using a currency propped up by other economies? It's not as if Denmark having an uncontrollable defecit would send the price of the Euro dramatically down, so why should a small country like Denmark not just exploit the Euro's stability and spend all the money they like?
  2. jcsd
  3. Nov 18, 2005 #2


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    I might be able to help you with a couple of your questions.

    Your conclusion is correct. The international exchange rate is based on demand for the currency. The international strength of a country's currency is dependant on the confidence in that country's economy. Currency is underwritten by the theoretical total value of their assets with a bonus for anticipated growth. Running up huge deficits begs the question of how the debt is going to be financed. If the servicing charge becomes very high it can have a deflationary effect on the economy (higher taxation) thus stifling growth whilst having an inflationary effect on the money supply as gov'ts print more money to try and pay off the debt. Unchecked this leads to hyper-inflation like in Germany after WW2 at which point money becomes worthless.
    12 of the (at that time) 15 members of the EU changed completely to the euro currency as of Jan 1 2002. i.e. the euro is their currency the same as the dollar is yours. In addition there are several other small states (such as Vatican City, Monaco and San Marino)and former dependancies who also use the euro and many more who's own currency is pegged to it. The UK still operates totally outside the eurozone and so still uses £sterling exclusively.
    The 10 new members will begin to join the eurozone from 2007 provided they meet the economic criteria demanded.
    It would be in euro. (fyi this is probably a useless bit of trivia but the plural of euro and cent for some unknown reason is euro and cent)
    As part of the membership requirements for the eurozone there are strict rules governing how member countries manage their economies. (although France and Gremany have been slightly outside these parameters for the past few years.) Ultimately if a member country did not abide by the rules they would be thrown out of the club. btw this centralisation of fiscal policy is one of the main reasons why Britain will not join the eurozone. Many British people view it as an assault on their sovereignty.
    Last edited: Nov 18, 2005
  4. Nov 18, 2005 #3


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    So now the British are being states-rightists? Didn't this same thing happen on a smaller scale when the US first opened a central bank and standardized the currency?
  5. Nov 18, 2005 #4


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    The British public as a whole are vehemently anti-european union and always have been.

    If Blair had been forced to hold his referendum on the european constition it would have been rejected by ~90% of the electorate.

    The reasons Britain joined the EU (or CAP as it was back then) were first it would have been economic suicide to remain outside and second to work from the inside to destroy it.

    To this end Britain is by far the strongest advocate of enrolling new members for the EU; the thinking being that the more countries they rope in the harder it will be to evolve into a US of E and the more dilute the organisation will become. That's why Britain are the one's pushing so hard to get Turkey in. In fact any day now they'll probably invite China to join :biggrin:
  6. Nov 18, 2005 #5
  7. Nov 20, 2005 #6


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    For years, unfortunately, I have the impression that this is less a joke than an accurate description of the situation :cry:
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