Does The Euro Crisis Effect Euro Using the Euro Non-Officially

Factual Questions
1

I was surprised to learn a couple of countries use the Euro that aren’t part of the EU, like Montenegro. (I was surprised to learn a few use the US Dollar, like East Timor and Panama)

I know next to nothing about how this Euro thing works, but you’ve all been helpful in the past.

Am I correct in saying that it’s not the currency but the fact that soverign nations have no control over it, that is causing part of the problem?

If so, does the Euro crisis effect countires like Montenegro or Kosovo which use the Euro without official sanction? Or, since they control their own money policy, does it make any difference.

Finally, I see some countries, have their currency pegged to the Euro. What exactly is that. Wikipedia has an article on it, but I’ll admit it’s not sinking in my head right. Can someone dumb it down a bit?

Does this Euro crisis effect the other countries which peg their currency? I am more interested in how it effects them.

Thanks

2

You peg your currency to the euro by adopting a policy of having a central bank (or other public insitution) always willing to exchange your currency for euros, or vice versa, in any amount, at a fixed rate. The Irish pound was pegged to the pound sterling in this way at the rate of 1:1 from 1922 to 1978.

A government which pegs its currency to the euro (or which simply adopts the euro in place of a national currency) effectively abandons national control over exchange rate and interest rate policy.

3

Part of the general problem of the Euro crisis for the Eurozone countries is yes, that there is no central ministry deciding financial matters for everybody, but instead, the Minister of Finance for each country seperatly decides how much money to borrow to cover the budget each year; as well as other measures to balance the budget like spending cuts or raising taxes. (And the way the Greek problem is handled now doesn’t give many people the confidence that handing over control to one person would be the right way, if that superminister would then follow the wrong course of cutting spending for the people on the bottom without raising taxes on the rich, or trying to raise the economy by cutting spending instead of infrastructure projects by the state and similar to create jobs lost in the private industry due to recession).

Countries like to be indepent. Part of that is not only controlling their own budget, but also having their own money, designing and printing it.

If a country decides therefore to use a foreign currency, whether it’s the US dollar, Pound Sterling or the Euro, instead of their own krones, liras, etc., it’s a loss of outward sovereignity undertaken for serious reasons:

  • the country is not only too poor to print their own money (security against counterfeiting means expensive machines), but also too poor to order another country to print their money for them, and too poor to print cheap money on the next colour copier. I think that’s rare, even African countries print their own money. Not very secure, but not a problem because the money isn’t worth much.

  • the country started out with their own currency, but through bad fiscal policy, loss of trust in the govt., revolutions, recession, inflation and other calamities, their own currency has lost so much value that citizens stop using it and use foreign money instead.
    This is the most common cause I know of and goes back over a hundred years, when English or Austrian gold coins could be used as currency in many Balkan, Arabian and African countries, often better accepted than the local currency.

Today this happens with troubled South American countries, or the former Jugoslav countries (at least for a time, haven’t looked what they’re doing now).

In that case, the govt. can decide to switch from one troubled foreign currency (the Euro) to a different one (Pound Sterling?), or they can wait if it recovers, or improve their own (maybe even do a re-start of their own currency).

4

It is generally believed that eventually the ECB will have to start inflated the Euro to help the perimeter countries. If this happens the effect on the countries using the currency unofficially is the same as on the countries using officially. Prices will go up. If a country is suffering from a too tight Euro this will help the country’s economy. If the country’s economy is doing well with the tight Euro they will likely be hurt. They could go off the Euro at this point but if they were good at having a currency they probably would not have gone on the Euro in the first place.

5

The problem with unofficial euro countries is the same as with the official ones. They have no control over monetary policy. If inflation happens they can’t do anything about it.

In such a situation, they are like the states in the USA. They have a “treasury” or “central bank”, but it basically has bank accounts with the rest of the world. You need money, you borrow. You need to pay bills, you write cheques. If at some point the rest of the world won’t cover what you promise to pay, you are broke just like some unemployed auto worker.

At least for the unofficial countries, it is simpler to create their own currency. They can do it any time, pass a law declaring that for all transactions they have jurisdiction over, the new currency (Montenegran Euro-Dinars, say) is now the currency. Then, they can control the fluctuations.

The difference is why they have to do so. Greece has promised so much money to bond holders and pensioners and civil servants, that soon the banks that pay those bills will want payment; if Greece has no money, it has to borrow to cover that; if nobody will lend them, they default on the loans and the pensioners and civil servants don’t get paid.

Normally Greece would print more money, it’s central bank would pretend the money was there, and everyone would be paid. They only problem is, outsiders who see this behaviour would want more to cover future inflation, so the Greek currency would become worth less (2 words) and so in relative terms, everyone takes a pay cut from the US dollar point of view.

The trouble is the moment there’s a hint that Greece is quitting the Euro, everyone will know this inflation/devaluation is coming, and they will all rush the banks to get physical euros before the government declares their accounts to be in Greek currency; the banks would go broke due to these runs on the bank. All the debt owed to foreign banks (a lot of it) would still be in Euros, so devaluation won’t help.Or else they don’t, the euro takes a dump an is devalued for all of Europe.

If Montenegro is basically solvent, then it can ditch the bad currency anytime for their own, and people would probably rather have the Dinars than Euros. Nobody expects the value of the Dinar to fall, so trading proceeds smoothly. Much smoother transition. Banks might be happy to sign a new deal, to accept M’s debt in dinars instead since they won’t be devaluing like the euro might.