I read an interesting article in the NY Times over the weekend about how U.S. companies are planning for various contingencies of Greece exiting the EU or even the Eurozone collapsing. International financial issues aren't exactly my area of economic expertise, but the practical questions of how day-to-day contracts are handled in the event of a re-organization I found pretty interesting. These include such plans as those of Bank of America considering having "dump trucks full of cash ready to drive over the border into Greece to continue to pay local employees and suppliers in the event money is unavailable." (Anyone else sense the making of a new Die Hard movie plot? Bruce Willis - call me!)
As a thought experiment, imagine you are a business in Hudson, WI on the border between WI and MN:
You have employees that work in both states, you have suppliers in both, and you have customers in both as well as various business loans from banks headquartered in each state. Suppose you wake up tomorrow morning to the announcement that we are abandoning the U.S. dollar and instead each state will have its own currency. Wisconsin will now be using only "Badgers" and Minnesota's currency will be called "Gophers." As a result of this, your life is now thrown into total chaos as you have to evaluate each of your contracts separately and worry about the Badger:Gopher exchange rate in each decision you make. Is it cheaper to hire only in-state employees now? Are you better off purchasing all your supplies from MN to take advantage of the low Gopher price? Should you pay off all your MN bank loans and refinance in Badgers?
This sounds far fetched, but it is exactly what every multi-national firm that deals in Europe is wondering at the moment. You can instantly see the appeal of having a common currency because it eliminates all of these concerns for businesses (and employees) entering into contracts (and it is particularly important for long term contracts).
On the other hand, the downside to having a common currency is that you give up all independent power to manage local economic conditions ... currently, Wisconsin is tied to whatever monetary policy decisions the Fed makes in the best interest of managing the NATIONAL economy. But, if the national economy is booming while Wisconsin is slumping or vice versa, then that national policy might be acting directly in opposition to the needs of the local economy. In the U.S. where capital and labor move across borders pretty freely, that usually is a tradeoff we're willing to make because the variance in state economic conditions has traditionally been relatively low and the inconvenience of separate currencies would be very high. However, in a group as diverse as the EU, this is a much more difficult proposition as there are generally nations with drastically different economic trajectories.
Incidentally, for those of you who couldn't be less interested in international finance issues, these types of issues also have profound sports implications. In the late 80's and early 90's when the Toronto Blue Jays were winning back-to-back World Series, it was no coincidence that the U.S./Canadian exchange rate was trending heavily in favor of Canada. The Jays were getting ticket revenue in Canadian $'s and paying their players in contracts denoted in American $'s, and the exchange rate was helping them to compete with the Yankees and other big money teams. This effect can be even stronger in sports with salary caps denoted in U.S. dollars such as basketball and hockey, and it works both ways (see: Vancouver Grizzlies becoming Memphis Grizzlies). What if the Viking vs. Packer rivalry hinged on the state currency exchange rate each year?
Some food for thought on a Tuesday.
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