In December 2001 I wrote a letter to the president of the European Central Bank (See copy of the original letter below). One month later I received a letter from the European Central Bank (ECB) in response to my letter. In March 2002, I wrote an article which was published on a Brazilian newspaper were I quote my letter and the response of the ECB.
Since I sent the enclosed letter to the president of the European Central Bank in December 2001 the US dollar has declining steadily in value against the Euro, and gold has increased in value from $ 295 to around $ 420 today.
When I wrote that letter to the European Central Bank in December of 2001 many people were predicting that the Euro was going to fall further in relation to the US dollar.
When I published the content of my letter in a newspaper article in March 2002 I received many letters to the editor and emails saying that I was very negative, and that I did not know what I was talking about, and so on. I also wrote an article which was published in June 2002 - “The Euro, Now.” The information that follows I am quoting from that article:
Article published in June 2002:
“The Euro, Now”
On December 12, 2001 I sent the enclosed letter to the president of the European Central Bank, regarding Brazil adopting the euro as its new currency. In January 2002. I received a letter from a senior official of the European Central Bank in response to my letter. I was pleasantly surprised by the content of that letter. It is clear to me by their answer, that the door is open to Brazil at the European Central Bank, if Brazil decides to adopt the euro as its new currency.
In my letter to the president of the European Central Bank I mentioned that the US dollar was overvalued over the price of gold at US$ 295/oz at that time and the euro trading at US$ .85¢. Six months later, on June 4, 2002, gold was trading at US$ 325/oz and the euro was trading at US$ .95¢; during this period the US dollar declined in value by 10.2 percent in relation to gold and also declined by 11.8 percent in relation to the euro.
The alarm bells finally started ringing in the United States and abroad. The Business Week magazine issue of May 6, 2002 had an article entitled "Debt Overseas Stirs up Trouble at Home, " in which the magazine stated, "The growing current-account deficit might set the U.S. up for a fall. U.S. financial obligations to the rest of the world are once again on the rise as America grows ever more dependent on foreign capital to finance its growth. Back in March, Federal Reserve Chairman Alan Greenspan noted that over the past six years, about 40 percent of the increase in the U.S. capital stock was financed by foreign investment, a pattern that will require an ever-larger flow of interest payments going out to foreigners. "Countries that have gone down this path invariably have run into trouble," said Greenspan, "and so would we."
The Economist magazine issue of April 27th- May 3rd, 2002, also had a similar article on the US current-account deficit. It was called "The O'Neill doctrine". According to the British publication, "America's huge external deficit is an accident waiting to happen. (...) The International Monetary Fund says that America's current-account deficit poses one of the biggest risks to the world economy. (...) If capital inflows were to dry up, the current-account deficit would have to shrink, either through a slump in domestic demand or a fall in the dollar, or both.
"A study by the Federal Reserve of large current-account deficits in developed economies found that deficits usually began to reverse when they exceeded 5 percent of GDP. And this adjustment was accompanied by an average fall in the nominal exchange rate of 40 percent along with a sharp slowdown in GDP growth. America is likely to move into this danger-zone by the end of the year."
The New York Times published on May 2, 2002, the article "Dollar Falls as Top Official Casts Doubt on Intervention". They wrote: "After saying his goal was to avoid upsetting the financial markets, Treasury Secretary Paul H. O'Neill did just that today by sparring with members of a Congressional committee about the nation's financial condition and leaving some investors with doubts about his willingness to defend the weakening dollar.
…The Washington Post had an article on May 29, 2002 by Robert J. Samuelson: Superdollar: Friend or Foe " In it, Samuelson writes, "If you want to scare yourself, contemplate the following. The dollar begins to fall. That is, its value slips relative to other currencies. Foreigners with massive investments in U.S. stocks and bonds begin to sell their holdings. They fear currency losses on their American investments because a depreciated dollar would fetch less of their own money. The selling then feeds on itself. The stock market swoons. American consumer confidence withers. The recession resumes and spreads to the rest of the world through lower U.S. imports. (…) There are huge foreign investments in the United States that could be sold quickly. At the end of 2001, foreigners owned $1.7 trillion of U.S. stocks and $3.2 trillion of government and corporate bonds. The conditions for a dollar crisis exist, but that doesn't mean one will happen".
Avoiding Chaos in Brazil
…Now that we know for a fact that adopting the euro is a viable option for Brazil, then it is imperative that the Brazilian government moves in that direction as soon as possible, before the smart money starts leaving Brazil and starts a stampede.
Here is a copy of the letter to the European Central Bank:
December 12, 2001
Dr. Willem F. Duisenberg
European Central Bank
Postfach 16 03 19
D-60066 Frankfurt am Main
Dear Dr. Duisenberg:
In the last two years I have written various newspaper articles published here in the United States regarding Brazil and the euro. Enclosed is a copy of my last article of that series. I have been recommending that Brazil replace its current currency the Real for the currency of the European Monetary Union the euro.
In the coming years most countries of the world will have to make a drastic decision; they will have to decide if they will adopt as their new currency the euro, the US dollar or some other currency from Asia. I believe that Brazil should adopt the euro and also should integrate its economy with the European Union's economy.
Keep in mind that it will be just a matter of time for the European Central Bank to be forced to deal with that issue triggered by some major international monetary crisis.
Today, the Brazilian economy has an Achilles heel, which is its currency the real. On January 1, 2002, the international monetary game played in the last 30 years comes to an end. Starting in January the US dollar will not be the only game in town. I believe the euro will become a major competitor to the US dollar, and will be accepted around the world as a major currency. The euro will become an important part of the monetary reserves of most countries.
When the time comes for the European Monetary Union to make the decision to accept Brazil as one of its members, that decision will be very important not only to Brazil, but will have a major impact on the international monetary scene for decades to come. It will be for the benefit of the members of the European Monetary Union to offer Brazil membership in that monetary club.
Brazil has a young and vibrant population and can offer to the European Union a growing market with 170 million people. The adoption of the euro by Brazil would stabilize the Brazilian economy and would open the door to many new economic opportunities between Brazil and the members of the European Monetary Union. This new stable monetary environment would provide new opportunities for European investments in Brazil.
I want you to keep in mind when the European Monetary Union debates the merits of accepting Brazil for membership, that the country Brazil is one of the jewels of our planet. Brazil has a privileged geopolitical location on our globe. Brazil has an up- coming emerging market economy with abundant natural resources, including the magnificent Amazon jungle, and also a modern economy evolving and adapting very fast to accommodate the new technologies developed around the world.
The next time that Brazil decides to change its currency again, they will have only two alternatives to choose from this time around; either they adopt the euro or they adopt the US dollar. I believe that it would be a privilege for the European Monetary Union to have Brazil as a member of that club. Brazil and the members of the European Monetary Union will have much more to gain from that association than if Brazil adopts the US dollar. Please be prepared in the future to welcome and to offer Brazil membership to the European Monetary Union.
I believe that the Brazilian economy matches much better with the economies of the countries which comprise the European Monetary Union than to the economy of the United States. From a Brazilian point of view, it is more appealing to adopt the euro instead of the US dollar, because of the US dollar's vulnerability to the international monetary market system.
The long-term US trade imbalances have created a large pool of US dollars in the hands of relatively few central banks around the world. These nations continue to run large trade surpluses with the United States, and they continue to increase the pool of US dollars held by their central banks.
Forbes Magazine's columnist Steve Hanke estimates that today 70 percent of US currency circulates outside the United States. The major holders of this currency are the euro countries, Japan, China, Hong Kong, Taiwan, South Korea, Indonesia, and Singapore.
Probably today, there is an oversupply of US dollars outside of the United States. Gold at US$ 295/oz might be undervalued when compared to the US dollar.
At US$ 295/oz gold provides about 15 percent of official world monetary liquidity. Central banks hold only one-third of the above ground gold supply available. Gold is the second largest component of international monetary reserves after the US dollar.
Gold and the euro will became increasingly important parts of the international monetary reserve system and their gains will be at the expense of the US dollar.
If any of these countries decides to move their monetary reserves from the US dollar into gold, the price of gold would increase versus the US dollar. If that happens in the near future we will have a major international monetary crisis in the world.
About 75 percent of the US dollars circulating outside the United States are in the hands of these few Asian central banks, and if any one of these countries decides to sell their US dollar monetary reserves to buy gold it will produce a stampede to exit the US dollar, creating a gold and euro buying panic.
Remember the euro countries also have a large supply of US dollars, which they can use to buy gold. When the European Central Bank moves from US dollar into gold, the euro will become stronger versus the US dollar, in turn giving an incentive to the other countries to move their international monetary reserves also from US dollar into euro or gold.
When this US dollar collapse becomes reality, the less developed countries will be the most devastated by this event, because these countries hold only a small fraction of their reserves in gold or euro.
This oversupply of US dollar circulation outside the United States might prove to be the Achilles heel of the US economy and also can become a nightmare to the Federal Reserve. The Federal Reserve would need to raise interest rates in the US, creating a major problem for the US economy and the financial markets.
I believe that it will be too risky for Brazil to adopt the US dollar because of this oversupply of US dollars circulating around the world. It will be better for the Brazilian economy in the long run for Brazil to adopt the euro.
The current US dollar based international financial system is about to go through a dramatic change because of the new competition from the euro. I don't know, when or what will trigger the coming events, since no finance minister or central banker wants to be blamed for launching the world into a major international monetary crisis.
I hope you will enjoy reading the enclosed article about Brazil adopting the euro, and please share this information with the Finance Ministers of the countries which are members of the European Monetary Union.
SouthAmerica: Since December 1998 I had a number of articles published regarding Brazil Adopting the Euro as its new currency.
I received a lot of emails and letters to the editor over the years regarding these articles, and I also had the chance to talk to various Brazilian bankers and Brazilian government officials. Everyone seems surprised by my suggestions on these articles regarding the Brazilian currency including the Brazilian bankers that I had the chance to discuss the subject.
Lately, I have been re-evaluating my suggestions regarding Brazil adopting the Euro and have made some adjustments to my current suggestions based on the new economic realities of globalization.
Brazil and the Euro - Part 1
Part l – Published in July 1999
“How can currency stability be achieved for the Brazilian economy?”
On January 1, 1999 the rules of the game for international currency speculation have changed in a drastic manner with the birth of the euro.
The number of currencies which international currency speculators can invest and play their speculative games has been reduced by 10. In the past, we had the currencies of eleven European countries; today these currencies are being replaced by one the "euro."
In the near future the remaining members of the European Economic Community including such countries as England and Sweden will adopt the Euro as their currency and become members of the new European Monetary Union (EMU). Today the amount of money that international speculators have under their management is becoming mind-boggling.
The amount of daily currency transactions in global markets is over $ 1.5 trillion dollars. The magnitude of daily currency transactions is a major contributing factor for many countries losing their capability to defend their weak currencies from foreign attack of these international money speculators.
These countries don’t have the economic reserves necessary to defend their currencies from foreign speculative attacks. It is getting easier for these international speculators to destroy the entire economy of countries such as Russia, Indonesia, Malaysia, Thailand, South Korea, and Brazil.
All they have to do is destroy their currency and the economies undergo a complete collapse. It is a form of modern economic warfare. Brazil should become a member of the European Union and immediately adopt the euro as its new currency. Based on sound macroeconomic analysis, this is the best alternative available to Brazil to achieve its goals of economic growth and currency stability.
The elimination of exchange rate risk between Brazil and the euro countries should stimulate capital flows, improve trading, and access to capital markets. Sound monetary policy will translate into lower interest rates, and long-term economic survival and prosperity.
The Euro—a historic turning point
We are at a turning point in history. The U.S. dollar is in the same position today in which the Pound Sterling was at the end of the First World War. The U.S. dollar replaced the Pound Sterling as the dominant currency in the following twenty-five years. The best choice among the major currencies of the future is the euro. In a few years there will be three major currencies: (a) U.S. Dollar, (b) Euro, (c) Yen (or some other new Asian currency) and the currency of most countries will not be able to survive with their independent currency policies, including England with the Pound Sterling.
The new European Central Bank under the leadership of the Germans will be recognized as a new leader in international money matters, and the euro will qualify in short order as a strong international currency. Markets will recognize the strength and stability of the European Union’s economy, and in the future the euro will be one of the major reserve currencies in the world.
It will not take twenty-five years this time around for this process to develop. This will occur at a very fast pace. It would be a smart move for Brazil to apply for membership in the European Union and to adopt the euro immediately as the new currency in Brazil. Today, countries around the world have official reserves as follows:
Percentage share by currency:
U.S. Dollar = 60 percent of market
Euro Group = 20 percent of market
Yen = 6 percent of market
Other = 14 percent of market
Most people should not be surprised if in ten years the breakdown of official reserves of the countries around the world will be as follows:
U.S. Dollar = 35 percent of market
Euro Group = 35 percent of market
New Asian Group = 25 percent of market
Other = 5 percent of market
The decline of the U.S. Dollar.
The U.S. dollar and the U.S. economy will encounter many problems in the near future related to the bursting of the Wall Street bubble, the costs of taking care of an increasing number of elderly citizens, and its over $ 7 trillion of cumulative government debt.
If Brazil is thinking of the future, they should think in terms of the euro. If Brazil wants to base its future policy on the past, then it should think in terms of the U.S. dollar or Pound Sterling. Brazil is being pressed by the international currency speculators to bite the bullet at this point. To best position the Brazilian economy for the future, the Brazilian government should adopt the euro immediately as its new currency and should plan to bring Brazil as close as possible to the European Monetary Union.
Why should Brazil make this transition immediately?
The timing is perfect for this transition. This move would give Brazil a chance to go through this period of economic adjustment at the same time as the European countries. This process would bring the Brazilian and European economies closer, and would promote further economic integration. If the Brazilian government decides to bring Brazil to the U.S. dollar group, then Brazil always will play second fiddler to the United States.
On the other hand, membership in the European Monetary Union will mean that Brazil will be treated as an important member of that group. The adoption of the euro by Brazil would provide the currency stability necessary for long-term growth, investment, lower interest rates and access to European money markets.
After speaking with some Brazilian newsmen and some Brazilian bankers in the United States, I was surprised at their response to my questions. They told me that they have not given any thought to the possibility of Brazil belonging to the European Monetary Union and adopting the “Euro” as its new currency. Everybody seemed surprised by my suggestion.
U.S. Dollar = Yesterday, Euro = Tomorrow
The Brazilian politicians will try to keep the old game on, but with official reserves around U.S.$ 40 billion it will not be long before this small reserve is run down to the ground. When this scenario develops, Brazil will be economically demoralized and in a very weak position to adopt the euro or the U.S. dollar.
If the Brazilian government reserves are run to the ground (a very real possibility) and Brazil becomes bankrupt or in a similar situation as Russia or Indonesia, then Brazil will be in a very weak position to request membership at that time.
By adopting the euro immediately as its new currency, and working out the details for full membership to the European Monetary Union, later Brazil will be in a better economic position to meet the requirements for full membership.
Brazil is going through a difficult economic time, because of the new global economy. It is time to wake up and adopt the euro as its new currency. Keep in mind that this change will have major beneficial long-term consequences and would place the Brazilian economy on the correct path towards prosperity in the new millennium.
Brazil and the Euro Part II – Published in November 1999
“How can currency stability be achieved for the Brazilian economy?”
The short-term sacrifices required by the Brazilian people to meet the euro’s requirements will be rewarded in a big way in the future -- with monetary stability, lower interest rates, a sound economic environment for investments, and access to European money markets.
By: Ricardo C. Amaral
The original article was published by "The Brasilians" issue # 295, July 1999, page # 4E. The current article is in response to letters received by the editor regarding that article.
Out of the 15 countries which comprise the European Union (EU), 11 countries also belong to the new European Monetary Union (EMU). The (EMU) country members adopted the new currency -- the euro, as of January 1, 1999.
The resulting euro market created an economy with more than US $ 6 trillion in gross domestic product (GDP). If Brazil becomes a member of the European Monetary Union (EMU) the Brazilian economy would add another 15 % to the size of the (EMU); an increase of (GDP) to US $ 7 trillion.
There are some (EMU) criteria established by the Maastricht Treaty which countries wishing to join the (EMU) are required to meet before they are allowed to join the euro group. The criteria are as follows:
• Their inflation rate should be within 1.5 percentage points of the three best performing (EMU) countries.
• Their exchange rate should be stable in relation to the "Euro".
• Their government debt must be less than 60 % of gross domestic product (GDP).
• Their government budget deficit must be below 3 % of their (GDP).
Four countries that are members of the European Union (EU) -- England, Sweden, Denmark and Greece, are not members of the (EMU). Greece wanted to be a charter member of the (EMU), but they did not meet the economic criteria for membership. The other three countries decided to wait and see how the euro system experiment actually works before they decide to become a member of this new system. It is just a matter of time for them to join the club.
Can Brazil qualify for euro membership?
In January 1999 the Brazilian Government budget deficit was around 8.5 % of (GDP). To qualify as a member of the new euro club, Brazil would need to bring its budget deficit to the 3 % benchmark.
The short-term sacrifices required by the Brazilian people to meet these requirements will be rewarded in a big way in the future -- with monetary stability, lower interest rates, a sound economic environment for investments, and access to European money markets.
Why do Brazilians have over US $ 150 billion dollars invested outside Brazil? Because they are not fools, and they don't trust the country's currency -- such as the Cruzeiro, the Cruzado, the Real or any new weak currency they might adopt in the future.
If Brazilians don't trust their own currency, how can we expect people from other countries to have any trust in the soundness of the Brazilian currency? If you are a Brazilian, you know that to protect your assets you have to transfer them out of Brazil to a safer and more stable economic environment, such as the major countries of the European Union or the United States.
The adoption of the euro by Brazil would stop this Brazilian capital flight and would provide a sound economic environment in Brazil, with a sound and stable currency which Brazilians can trust; then Brazilians would be able to bring back home the US $ 150 billion dollars invested in foreign lands.
If you want a more detailed explanation of the reasons why Brazil should adopt the euro as soon as possible, you can read in the Fall 1999 issue of "Foreign Policy" the following article written by Mr. Ricardo Hausmann, chief economist of the Inter-American Development Bank, "Should There be Five Currencies or One Hundred and Five ?"
What floating currencies mean to Latin American countries?
Some highlights from Mr. Hausmann's article follow. He said, "A recent study by the Inter-American Development Bank suggests that Latin American countries with floating currencies end up with financial systems that are 15 to 30 percent smaller than they otherwise would have been. One reason is that letting the exchange rate appreciate in good times and depreciate in bad times reduces the incentive of residents to hold their assets in the domestic currency because it does not help diversify the income risk they already bear. In good times, when incomes are high and people are in a position to save, the value of their previously accumulated savings goes up through currency appreciation. In bad times, when income is low and people might wish to dip into their savings, they find their assets are worth increasingly less because of currency depreciation. Hence, residents of these emerging-market countries will want to hedge their savings by moving them out of the domestic currency."
Mr. Hausmann's article describes how "floating exchange rates in Latin America has increased the volatility of domestic interest rates, making banking a riskier industry. Floating can entail huge costs. It could be the catalyst for a shrinking financial system, as residents move their assets out of the domestic currency. It can cause domestic savings to flee, leaving countries with fewer resources to finance growth. In addition, highly volatile domestic interest rates will make banking riskier and will conspire against the development of long-term markets."
Mr. Hausmann's article also describes how "abandoning a weak national currency in favor of a stronger international or supranational currency would eliminate currency and maturity mismatches, because debts would be denominated in the same unit as a company's cash flow. It would also allow countries to take out long-term loans."
The adoption of a supranational currency such as the euro by Brazil would bring the following benefits, according to Mr. Hausmann's article: "supranational currencies would be more stable and safer for capital mobility. Long-term interest rates would decline and become less volatile -- as we have seen in Europe, where interest rates have gone down in Ireland, Italy, Portugal and Spain -- making it easier to cut budget deficits and promote growth."
Why did England and Sweden stay out of the new euro system?
Sweden took a conservative position to first see how the euro system works in practice before they decide to become a member of that system. England also took the same conservative position, but in the case of England it is hard for them to give up their national currency because of national pride after being a world power. England was the major world power until 1918, and the Pound Sterling was the major currency in the world during England's reign as king of the hill. It is hard to let go of the past.
Today, England is not even the most influential country in the European Union, and it will soon realize it is time to move forward into the future, and it will adopt the euro as its new currency, leaving the history books to remind them of their past as a world power and of the glory days of the Pound Sterling.
What happened to the value of the euro in relation to the US dollar?
The euro was born January 1, 1999 at an exchange rate of US $ 1.17 to $ 1.00 euro. The expectation of the creation of the new currency in Europe in the fall of 1998, helped the euro currencies to increase in value in the last six months of 1998. When the euro born on January 1, 1999, that currency was overvalued by an estimated 9 percentage points in relation to the US dollar.
The euro just adjusted itself in relation to the US dollar from January 1, 1999 rate of US$ 1.17 to the current rate as of October 22, 1999 of US$ 1.067. The current rate reflects the current economic realities behind the two currencies. I have no doubt that the euro is here to stay, and it will become a major competitor to the US dollar in the international financial arena.
A final question raised by my article was regarding the geographic location, and the assumption that the euro was created to be adopted only by European countries.
With today's technologies in computers, communications, satellites, air travel, etc, distance is not an issue to stop any country from adopting the euro as its new currency. In that regard I want to remind the readers that Brazil and the United States operated for centuries with the currency of European countries. Brazil was a Portuguese colony until 1822 and the United States was a British colony until 1776, and before independence these countries operated with the currency of these European countries. The world has changed a lot since then. Country currencies used to be backed by gold or silver reserves; in comparison, today what do we have backing up the US dollar?
How about the future value of the US dollar in relation to the euro?
Today, the fortune of countries can change very fast. As we look around the world we can see what happened to the Soviet Union, Malaysia, Indonesia, Thailand, and Brazil, just to give a few examples of countries with weak currencies. A strong currency such as the euro implies that the governments behind that currency will protect the value of the currency, in turn creating a safe environment for investments to flourish and grow.
Yesterday, the Pound Sterling was king, but today England is reevaluating its options and in the near future the Pound Sterling will be history. Today the US dollar is king, but in the coming years the US dollar also will lose its appeal as the world changes and new competitors including the euro challenges the US dollar in the international financial arena. The reality check for the US economy and the value of the US dollar in relation to its competitors is around the corner with the expenses related to an aging population compounded by the weight of the US $ 7 trillion dollars of cumulative US government debt.
The United States has a cumulative federal government debt of US$ 5.5 trillion dollars plus other borrowings from various funds including the following amounts as of July 1999: Social Security US$ 845 billion dollars, Medicare US$ 148 billion dollars, Military Retirement US$ 140 billion dollars, Civilian Retirement Fund US$ 490 billion dollars, Unemployment Compensation US$ 81 billion dollars, Highway Fund US$ 35 billion dollars, Airports Fund US$ 15 billion dollars, Railroad Retirement Fund US$ 21 billion dollars, all others US$ 58 billion dollars, for a total adjusted actual cumulative United States debt of US$ 7.3 trillion dollars.
Eventually, the US government debt will catch up with reality, and the value of the US dollar will be adjusted accordingly in relation to other major world currencies. This is why Brazil should adopt the euro instead of the US dollar currency.
Can we create a new currency for South America?
If the countries of South America including Brazil and Argentina decide to create a new currency for that block of countries to compete with the euro and the US dollar in world financial markets, I have a suggestion for a name that would be very appropriate for that new currency -- the "Bankrupt."
In January 1999, I sent a letter to the President of Brazil, Mr. Fernando Henrique Cardoso and also to the Minister of Finance of Brazil giving them in detail the reasons why they should put in place a plan for Brazil to adopt immediately the euro as its new currency. I also sent copy of that letter to the Brazilian ambassador in Washington, and faxed copies of the letter to the major Brazilian newspapers and magazines in Brazil.
People tell me that Greece has not qualified to become a member of the euro and how can I expect that Brazil would qualify? An article published in "The Economist" in the issue dated October 16th , 1999 "The euro's in-and-out club" (pg. 51) claims that Greece is on its way to meeting the criteria for euro membership, and aims now to join in January 2001.
A lesson in leadership and statesmanship from our Brazilian history
In 1822, José Bonifácio de Andrada e Silva made many courageous decisions regarding our country Brazil, which assured us not only our independence from Portugal, but also kept our country from splitting into several parts. José Bonifácio's decisions projected a firm, decisive and powerful image of his administration also in his foreign policy. In his diplomatic letter to the American Consul in Rio de Janeiro P. Sartoris in which he appointed a diplomat to represent Brazil in the United States, José Bonifácio wrote " Dear Sir: Brazil is a nation and will take its place as such, without expecting or requesting its recognition by the other world powers. We will send them representatives of our nation. Those nations who receive and deal with them in that capacity will continue to be allowed to use our ports and their commerce will receive favorable status. The nations that refuse our diplomats will be excluded from our ports and commerce. This is our frank and firm politics." He also sent a similar letter to Chamberlain, the English representative in Brazil."
Today, this is the kind of political leadership we need in Brazil, to guide Brazil for membership in Euroland and create a more stable economic environment for our country, and start the new millennium on the right path for growth and prosperity.
The United States has a much stronger and powerful economy because it operates with one currency -- the US dollar. The economy of the United States would not be as strong if California, New York and Texas -- each had its own currency. We have in the United States different economies operating under a single currency -- Texas has its oil economy, California has its high tech economy, Nebraska has its agricultural economy, but they all operate reasonably well under a single currency, even though some times a change in the value of the US dollar would benefit the economy of one state and hurt the economy of another state at the same time.
Why the euro will provide macroeconomic stability for its members?
The members of the Executive Board of the European Central Bank (ECB) are not there to represent their countries of origin. They are there to provide stability to the euro and they look at Euroland as a whole when making their policy. The euro is a monetary arrangement, and its monetary policy will be adopted independent from political control from its members.
This way of operating keeps the politicians out of the decision process and reduces the risk of them playing their political games with the country's monetary and currency systems. I am a firm believer that if the economic policies adopted by the (ECB) are good enough for such a diversified group of countries as France, Belgium, Germany, Netherlands, and Italy, then such policies also will be good for Brazil. The Brazilian economy will be better off under the euro system than under the fragile and weak Brazilian currency.
On a final note, on Wednesday, October 13, 1999 the economist Robert A. Mundell of Columbia University in New York, won the Nobel Prize for Economic Sciences. Mr. Mundell's innovative analysis of exchange rates in the 1960's helped lay the groundwork which eventually inspired the creation of the euro.
Brazil and the Euro - Part 3
Brazil and the Euro - Part III - Published in November 2000.
“How can currency stability be achieved for the Brazilian economy?”
Today, the Brazilian government is missing a great opportunity to adopt the euro as the new Brazilian currency. After Brazil adopts the euro, Brazil will have eliminated the currency risk between Brazil and the European countries of the European Union. Afterwards, the market place would make the necessary adjustments to the prices of assets in Brazil to reflect the fair market value of these assets in terms of the new euro currency.
By: Ricardo C. Amaral
The original article was published in "The Brasilians", in July 1999, and a follow up article was published in November 1999. Since November of 1999 we had some new developments regarding the new currency —the euro —as follows:
What happened to the value of the euro in relation to the US dollar?
The euro was born January 1, 1999 at an exchange rate of US $ 1.17 to $ 1 euro. The expectation of the creation of the new currency in Europe in the fall of 1998, helped the euro currencies to increase in value in the last six months of 1998. When the euro was born on January 1, 1999, that currency was overvalued by an estimated 9 to 10 percent in relation to the US dollar.
Since its inception in January 1, 1999 at US$ 1.17 the euro steadily declined in value against the US dollar and was quoted at around US$ 0.88 in New York trading on September 28, 2000. The explanation for this 25% decline in value of the euro can be explained as follows.
The first 10 % decline of the euro came about as the euro adjusted itself in relation to the US dollar to reflect the current economic realities behind the two currencies. The euro gave back the 10 % speculative increase that had occurred in the fall of 1998.
The other 15 % decline in the value of the euro can be explained in this quote from an article in Business Week (Oct. 2, 2000 Pg 144); EUROPE CASH IS FLOODING INTO THE U.S. "the financial tidal wave that has washed across the Atlantic is merely investment -- especially direct investment in the booming U.S. economy. European companies have been buying up U.S. outfits large and small -- from Unilever Group's purchase of Ben & Jerry's Homemade ice cream to megadeals like Deutsche Telekom's proposed $50.7 billion takeover of wireless communication company VoiceStream Wireless Corp. European companies made more than $ 170 billion worth of acquisitions in the U.S. in the first half of this year. As European companies have converted euros into dollars to close their purchases, the euro has hit low after low."
The Business Week article also mentioned that from the beginning of 1998 through the second quarter of 2000 the U.S. attracted more than $ 332 billion in foreign direct investment (FDI) from the euro countries (estimates from Morgan Stanley). Morgan Stanley also estimates $162 billion of foreign cash or stock purchases of U.S. companies were pending as of September 8, 2000.
Where is the bottom for the euro?
The euro can reach a bottom as low as 80 ¢ to 75¢ range in the short term. The decline in value of the euro started to have an impact on the earnings of American companies operating in Europe. These lower earnings will affect the price of these stocks in the American stock market. When the American stock market declines and returns to more realistic level, the Europeans will start repatriating their money, and the result will be the increasing value of the euro against the U.S. dollar. Before the end of 2001 the euro can be trading at 1 to 1 ratio in relation to the U.S. dollar.
Danish voters say "No" to euro. Does it really matter?
Let's put things in the right perspective before we get carried away by the Danish rejection of the euro. The euro countries have an estimated population of 350 million people. The European Central Bank (ECB) holds the equivalent of $ 39.6 billion in foreign currency reserves; its 11 member central banks hold an additional $ 222 billion, for a combined total of $ 262 billion in reserves. On the other hand we have Denmark, a country of 5.3 million people and $ 12 billion in foreign currency monetary reserves.
Why did the Danes inflict such an economic blow on themselves? What will happen when their currency comes under speculative attack in the future? Can Denmark prosper in the future, in the new global economy, without the protection afforded by the euro membership?
Greece and the euro
On June 19, 2000 Greece was accepted by the European Union Council for membership in the new currency the euro. As of January 1, 2001 Greece will became a new member of the euro, bringing to 12 the number of countries that are participating members of that club.
Britain and Sweden
The "no" vote in Denmark was a vote reflecting the Danish population's anxieties in relation to the future of Denmark's welfare state. In Sweden the population also is worried about the structural reforms that might be necessary when they adopt the euro. Britain eventually will adopt the euro; otherwise they will lose the remaining influence that they still have in European affairs.
A weak euro isn't a failed euro
Business Week magazine published a article on September 18, 2000 (Pg.61) saying that all the gloom about the euro obscures the fact that the euro is already having a remarkably beneficial effect on Europe. It has stitched together 11 countries' financial systems, decreasing the cost of capital by creating a deeper, more liquid market.
...As a result, companies have issued stocks and bonds at record-breaking levels. Indeed, more euro-denominated than dollar-denominated bonds were issued last year: a staggering $ 600 billion, according to Capital Data Ltd. The money raised is funding acquisitions. As a result, the euro zone economy is being restructured and companies globalized.
The article also says that the euro puts pressure on governments, too. It makes it impossible for euro-zone countries to boost competitiveness by manipulating monetary policy. Instead, they must cut taxes, streamline social security systems, and make other reforms. They end the article by saying "Sure, the euro is weak. But a failure? No way."
Geographic location, and the assumption that the euro was created to be adopted only by European countries.
With today's technologies in computers, communications, satellites, air travel, etc, distance is not an issue to stop any country from adopting the euro as its new currency. I want to bring to your attention the fact that the euro is the official currency of a country in South America —French Guiana belongs to France and the official currency in French Guiana is the euro.
New currency for Mercosul
On October 8, 2000, the president of the Bank Interamerican of Development (BID) Mr. Enrique Iglesias; he said that it is inevitable that Mercosul adopt a single currency because it is a common market, and the monetary union becomes very important.
I agree with Mr. Iglesias that Brazil needs to adopt a new currency such as the euro, but I don't think the countries of the Mercosul or of South America have the necessary international monetary reserves to create a new strong currency for South America. If they go ahead and create this new currency for South America the Merco or the Bankrupt, either name is fine, this new currency will be doomed from the start — no solid international monetary reserves to back up your currency—no cigar.
The next time the Real (the current Brazilian currency) comes under international speculative attack, the Brazilian international currency reserves (currently 39 billion US dollars) might decline to new dangerously low levels. In turn, exposing the Brazilian economy to exceptional high monetary risk could be avoided by Brazil adopting the euro as its new currency.
A chance of a lifetime
Today, with the euro "no" vote from Denmark, and all the negative press that the euro has been receiving lately, there is an exceptional opportunity for Brazil to announce that it will adopt the euro immediately. That vote of confidence from the Brazilian government and the Brazilian people towards this new currency would open many doors in Europe, and would give a big boost to the euro in international currency markets.
BRAZIL — It is time to wake up!
Today, the Brazilian government is missing a great opportunity to adopt the euro as the new Brazilian currency. After Brazil adopts the euro, Brazil will have eliminated the currency risk between Brazil and the European countries of the European Union. Europe is a very important exporting market for Brazilian goods and services, and the elimination of the currency risk will help increase the volume of business between Europe and Brazil. Afterwards, the market place would make the necessary adjustments to the prices of assets in Brazil to reflect the fair market value of these assets in terms of the new euro currency.
After Brazil Adopts the euro —as its new currency, the rest of South America will follow its lead and also will adopt the euro. The euro would become the main currency in South America.