Today at TILE we talked about the (apparent) economic chaos in Europe… How does one little country like Greece impact an entire continent? Why does (or why did) the euro make sense? Why do currencies seem so difficult to understand? Does all of this make you want to jump on a plane or curl up in your own backyard?
The euro was created in 1999 – a joint project by countries in the eurozone* to become more competitive on the economic playing field. By reducing the economic friction between the eurozone countries and increasing the group negotiating power between the eurozone and other countries, the idea was that the group would become stronger (in other words, the whole would be greater than the sum of its parts). For example, every time you skied up a mountain in Switzerland and down the same mountain into France, you would no longer have to stop to change currencies (and pay fees and taxes) before warming up with a hot chocolate. The idea was that with less hassle, more people would want to ski/ do business in that area.
During good economic times, the euro made a lot of sense for everyone – strong countries (like Germany) got stronger and less strong countries (like Greece) got a little stronger. Unfortunately, as the market turned down the euro has started to feel like a group project gone bad. Even though everyone passed a requirement (met certain economic conditions) to get into the class, it doesn’t mean they were all straight A students. Remember the last time you worked on a group project? If one student was slacking, did you put in extra effort to make sure everyone got a good grade… or did you just give up? In the real-life economic classroom of Europe, Germany is kind of like the economic whiz kid deciding if she is going to help out the one that stayed up night after night going to parties. Can she afford to let the entire community be hurt by the poor economic decisions of one or two countries (like Greece)?
Currencies, like stocks, become more or less valuable based on what people think will happen in the future. However, unlike stocks, currencies are traded relative to other currencies (i.e., do you think the euro will be stronger/weaker versus the U.S. economy and dollar in the future?). Kind of like grading on a curve, the value of one currency versus another determines if an item that is produced in one country (like Italian leather shoes) is more or less expensive when sold in another (like at Saks Fifth Avenue in New York).
What does this mean for the TILE community? Since it is summer time and many people are heading to Europe for a trip (or maybe even planning a semester abroad) we might encourage you to think about where you go. What is the value of the currency relative to the U.S. dollar (USD)? If it is strong compared to the dollar, you may need to take more supplies with you (can you imagine paying $12 for a Coke?!). On the other hand, if it is weak, it may be a good time to stock up on some special purchases! Timing is also something to consider. Do you think the relationship between the currencies will change between now and when you go? If yes, do you want to buy those currencies ahead of time or wait until later? No one can predict the future, but if you’re right about the exchange rate, you might get a good deal. Have fun with your travels… and remember that group project when you hit the ATM in Luxembourg!
- Amy
* The eurozone is made up of 17 countries that use the euro as their currency: Belgium, Ireland, France, Luxembourg, Austria, Slovakia, Germany, Greece, Italy, Malta, Portugal, Finland, Estonia, Spain, Cyprus, The Netherlands, and Slovenia