The Loudenia Crier

Thomas Rawski, Professor of Economics at the University of Pittsburgh, weighs in on the Loudenian Euro Conversion Bill with testimony that comes after the bill’s passage, yet is sure to deepen understanding of this important issue for all Loudenians who are making the transition from the Louda to the Euro:

1. Currency is now fixed at L$1 = US$1. If the proposal is approved, the L$ will be pegged to the Euro, which now trades around E1 = US$1.56.

2. The initial shift may have little effect on the L economy. However
if the Euro continues to appreciate vs. the US$, exports to USA could
suffer (or benefit, if the E depreciates).

3. Tying national currency to an external standard has both benefits and
costs. The benefit, as mentioned in the proposal, arises from the
stable relation to a major currency bloc. This comes with a sacrifice -
of independent monetary policy. If the European authorities decree
tight money when L faces recession (analogous to the current situation
confronting Spain, for example), L may come to regret its lack of
monetary independence. If L government lacks economic discipline,
strong links to the Euro may benefit the L economy over the medium-long
term. If Euro managers lack economic discipline (note massive recent
increases in Euro money stock), the links could have unfortunate
consequences.