The Euro

There goes the buck? Will that flashy new currency and coinage called the euro, spell doomsday for the used to be almighty dollar? Hardly. Before we go into the euro, its history, and coverage, let's state at the very beginning, that all the rumors and talk about the euro being backed 15% with gold, are as false as the supposed intellect of George W. Bush. It ain't so. The euro is just as much unbacked paper money as is the dollar. The euro coins, which are, believe it or not, denominated in "cents," are in the one, two, five, ten, twenty, and fifty-cent denominations, and are made of base metals of copper-nickel, and brass-nickel. In addition, there are larger coins of one and two euro denominations. There are no smaller paper euros than five, and they go up to 500 euro paper bills.

If you go to Europe, or at least part of it, the euro might well be used as currency, so you might as well familiarize yourself with them. Of course, only a dozen European nations have adopted the euro, and a couple of them, are now having second thoughts on the matter, namely France and Greece. Great Britain hasn't fallen for the euro, and neither have the blue eyed, blonde nations of Switzerland, Norway, Denmark, and Sweden. As a matter of fact, it's far easier to name those who have, rather than those who haven't gone to the euro. Those which use the euro, are Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, The Netherlands, Austria, Portugal, and Finland.

It began with the Treaty of Rome, way back in 1957, when the attendees declared that a common European market was a worthy objective. That does make sense, since, compared to the US, Europe is small, and has many little nations encompassed within, and all speak different languages, and have different currencies. The Treaty of Rome declared that, "An ever closer union among the peoples of Europe," would increase economic prosperity. Makes sense to me. Then there was the "Single European Act," and "Treaty on European Union," which furthered the cause, plus the "Economic and Monetary Union (EMU), which was the foundation of what became the euro. The treaties which originated the euro, were all signed and voted upon by the twelve member nations.

Understand that the European Union, consists of far more than the twelve nations which have adopted the euro. The euro using nations, are perhaps half of those nations in the European Union.

On January 1, 1999, the exchange rates were set among the nations who were joining. Of all the complex things to do, setting the exchange rates were the most complex, time consuming, and controversial. Picture the French Franc, German Deutschmark, and Italian Lira, with wildly different 'values,' being trashed, and a totally new currency replacing them. What was priced in thousands of lira, would be priced in just a few euros, as an example. Many, if not most of the citizens of the 12 nations involved, didn't like it one bit, as they had become attached to their native currencies. Suppose someone forced the dollar to be extinguished, and a new currency from some foreign nation was to be imposed upon us? Would we like it? Most Europeans didn't either. But governments will have their way, and probably in this case, it was for the best. Greece was the last to join, and their membership and commitment is dated January 1, 2001.

THE CENTRAL BANK

The European Central Bank, comparable to the Federal Reserve here, administers the euro, and of course prints it. The European Central Bank (ECB) was established on June 1, 1998, four years before the euro was issued. It is located in Frankfurt am Main, Germany, and naturally, one of its aims is to "maintain price stability." Sound familiar? If you go to the bank's web site, they speak in glorious terms about maintaining price stability, keeping inflation at 2%, and other gibberish, which means nothing, other than they can print till the cows come home, just like the Fed can here in the US. Will they? Have they? Of course they will, and probably already have, but I don't know for sure.

The one thing I do know, is that central banks are a curse, and an evil without equal. Our Founders did everything in their power to prevent America from having a central bank, and twice threw them out. Alexander Hamilton, fortunately was killed by Aaron Burr in that duel, or he might have been successful in attempting to form yet another central bank. The euro is based out of, controlled by, and inflated by, their own central bank. Maybe the old saying is indeed true that "There is nothing new under the sun."

No where, in any web site or publication, is there any mention of the euro being backed 15% with gold, and the central bank's web site only speaks of its sales of gold…not a sign of sound money.

Each member nation, has its own central bank, all of which are under the main one. Each individual central bank, does its own printing job, and coining the coins. To quote: "In practice, the different national central banks are responsible for the practical aspects or putting bank notes and coins into circulation, since they provide commercial banks and the cash-in-transit sector with the necessary quantities of notes and coins." Get it? They can do anything they deem convenient as far as issuance is concerned. 'Need a loan of a few hundred thousand euros? Fine, we'll just wrote you a check or place it in your account, and the old fractional reserve banking system is in full flower.' Just like in America.

I am certain that the European Union, which abolishes tariffs and travel restrictions…supposedly…is a blessing. The euro, I am certain, has made things a lot simpler in trade between the member nations. Those nations who have not joined up with the euro, have set conversion rates for their own currencies, and this is nice. No one can fault those nations who have joined together in a common currency. It makes a lot of sense. But if it is printing press money, with no limitations, and base metal coinage, what on earth difference can it make as far as potential worthlessness is concerned?

When the euro was first introduced, it promptly fell in dollar price, to 88 cents from its opening price of $1.18. Everyone said it was doomed, and that the buck would remain supreme. The euro gradually gained on the buck, and has now overshadowed it, with its current price at about $1.28. Is the euro a good "investment?" Since it is obvious that the buck is being printed by the literally trillions each year, thereby causing prices to rise and purchasing power to fall, is the euro doing the same? And if it isn't, what's to keep it from doing just that in the future? Answer: Nothing.

The euro is the new guy on the block, and it's still a shiny, new item. The Pound, yen, pesos from various places, Yuan, renminbi, etc, are all merely paper money, just like Monopoly money. Rather than being printed by Parker Brothers, as in Monopoly, they are printed by various governments, and are used to pay that government's bills. When tax revenues don't meet that government's expenses, in euros, dollars, pesos, francs, or whatever, and they never do, the presses roll. Isn't that convenient?

Prior to WW I, all currencies in the world were defined as a certain weight of gold. The dollar, was one twentieth of an ounce of gold, and the pound was a quarter ounce of gold, as two examples. Coins of various realms, are still in circulation, and us precious metals dealers disburse them all the time. The Mexican 50 peso, has 1.2057 ounces of pure gold in it, the Austrian and Hungarian coronas have .9802 of an ounce of pure gold in them. The British Sovereign has .2354, and the French 20 franc, .1867 ounce of pure gold in them. On it goes, and these coins used to be used as currencies many years ago in these various lands. Canadian and Mexican gold coins were freely exchanged and used in all three nations before WW I. Gold was the common denominator in values and contents of gold. Silver content was usually 90% pure in coins around the world, the 10% impurity, usually being a stronger metal to keep the coins from bending and getting scratched.

The euro is merely another paper money, backed by nothing, and like every single currency in the entire world, its value is merely the paper on which it is printed, except for the compulsion of legal tender laws. Protect yourself…with real money.

Closed Monday, have a happy Memorial Day!

May 26, 2005

Don Stott has been a precious metals broker since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com