Travis Redd
Imagine never exchanging money when visiting a foreign country. What if the the world used just one currency? Although, one could no longer take cheap vacations to Mexico, products from countries like Great Britain would be more affordable. This is an idea that has resurfaced many times throughout modern history. In the 1900s, countries based their currency value on their gold reserves; and at the turn of the century, the largest experiment began: the euro. It united eleven European countries under a single currency. Today, the most likely successor of uniform currency is the crypto-craze, Bitcoin. But, can it overcome the euro’s failure of regulating properly for different countries? In short, no, it cannot. Recent history of the euro explains why.
Although, the European Union (EU) was established in 1993, the euro was not adopted until 1999; even then, only eleven countries adopted it. In 2002, the EU distributed official coins and physical tender. But, other than irreversibly converting their currencies, what else did they agree to? They forfeited the right to set individual interest rates and print money at their discretion. The European Central Bank sets fundamental interest rates for bank loans and its decisions apply across the Eurozone. However, nations still set their own budgets and taxes. Before analyzing the impact of this centralization on member states, one must understand the basics of monetary policy
Despite monetary policy’s complexity, it can be understood using main tools.. Countries manipulate their interest rates and money supply in order to regulate their economy. In times of an economic boom, governments will raise interest rates in order to incentivize saving. However during an economic bust, they will lower rates to incentivize spending. Printing more money reduces currency value. Some nations do this on purpose in order to make it cheaper for other nations to buy their goods, thereby increasing their exports.
In the EU a universal currency brought a few positives, but produced even more negatives. Previously, one had to pay an exchange fee to convert a currency. Now, the euro makes this unnecessary. This cost reduction encourages trade and commerce within the Eurozone. However, this benefit comes at the cost of the centralization of monetary policy. A universal currency, and a resulting universal interest rate, affect different economies differently. For some economies, the currency value may be too weak, and for others, too strong. The strength of a currency depends on its buying power relative to other countries’ currencies. If a nation’s currency can buy more in a foreign country than in its own, then this currency is a strong relative to the foreign country’s currency. If this currency buys less in a foreign country, then it is a weak relative to the foreign country’s currency. Where the strength of the euro sits represents a point of contention between Germany and Greece. According to the Observatory of Economic Complexity, Germany ranks as the third biggest exporter globally, thus deeming them the most influential economic power in the Eurozone. As such, the euro’s historic low value benefits them by giving them a competitive edge in the global market. However, while Germany prospers, Greece suffers.
Greece cannot entirely blame its debt crisis on the euro. Greece borrowed too much, let debts rise, and failed to prevent chronic tax evasion. However, when the crisis hit, the euro prevented them from mitigating the damage as they were unable to unilaterally lower interest rates and print more money in order to reduce their debt. Lowering interest rates and printing more money lowers the value of the currency, which in turn reduces the value of the debt, assuming the debt is owed in the same currency. But as Greece could not control its monetary policy, it had to accept the full, staggering amount of its debt. In sum, the euro was too strong for them to handle the debt. Finland and Spain faced similar issues as they also saw their economies shrink because of the euro. This reveals a fundamental problem with universal currencies: When countries unite in currency, but disagree on economic policy, this disagreement leads to winners and losers in the global economy.
What works for Germany clearly does not work for Greece. Further, while Germany reaps the benefits of the euro, it escapes the costs faced by Greece and other states. Thus, Germany lacks incentives to support a change in the euro’s strength. So, as long as countries share currency, but not the costs and benefits,a universal currency can never serve the best interests of all nations. Bitcoin does not change this fact.
Bitcoin is a cryptocurrency. Individuals all around the world create (or “mine”) bitcoin by using computers to solve complex, mathematical equations produced by a code. “Miners” use computers to solve the equations. Once a miner finds a solution, other miners electronically (and automatically) confirm and record it in the blockchain, a public, electronic ledger that keeps track of all bitcoin transactions. Because every miner wants to get rewarded with bitcoin, they all constantly check the blockchain for inconsistencies. This keeps the system honest. Bitcoin users store their currency in digital wallets that have private security codes. So, what kind of impact would this independent currency have on a country like Greece?
Bitcoin, unlike other currencies, operates independently of any government. No one can print more of it or create policy to affect its value. Its code caps bitcoin production at a little under 21 million. So, if Greece had used bitcoin instead of the euro during its financial crisis, they could not have printed more bitcoin to lower its value in order to reduce their debt. As such, bitcoin would not work as a universal currency, because it, similar to the euro, prevents countries from internally regulating their economies through monetary policy. Some may argue that this prevents governments from manipulating their currency to create unfair trade advantages. However, each nation needs the ability to manage its own currency so that they may regulate their economy in order to respond in times of crisis.
Again, consider how the same currency value affected Germany and Greece differently. Two countries fell under the same currency and it produced polarized results. Substituting bitcoin does not solve this problem as a single rate still exists. Further, because no entity directly regulates bitcoin’s value, Greece would have no appeal option. Currently, they can lobby to the ECB for a currency value that is more helpful to them. With bitcoin not having a controlling entity, there is no group to lobby.
Bitcoin lack of stability presents another obstacle on its road to becoming a universal currency. Its value fluctuated significantly over the past year. Even in the past few weeks, it experienced a moderate crash followed by a slow upward trend. Market activity causes this instability. Any large buying or selling craze can destabilize it. So, if one person, or group, has a large share of bitcoins, they can sell them off quickly or pretend to “buy” them using another bitcoin account. Dr. Neil Gandal et al. argue this occured in 2013 when Bitcoin’s value spiked from $150 to $1,000. Overall, bitcoin cannot do any better than the euro at regulating different countries with the same currency. As demonstrated in the EU, this represents an issue intrinsic to universal currency without a universal government. Countries need their own currency in order to regulate their economies through monetary policy adjustments. What works for one country does not work for all. Therefore, a world currency necessitates a world government to function properly. However, as bitcoin operates outside of government control, even world governments cannot fix its fundamental problems. Finally, even if every country joined together and used bitcoin, its stability would still lead to economic duress. Bitcoin simply cannot work.