Was Euro a case of demonetisation and did it work?

Prof JR Varma of IIMA points to this interesting piece by Peter Guy of Regulation Asia.

Guy says:

The dubious and arcane idea of getting rid of cash from a society creates the unintended consequence of disconnecting economic value from some physical holder into digital form. But money will be moved from banks to solid assets, to havens that actually have a physical store of value.

Even worse, it may migrate to the inefficiencies of a barter economy. The citizenry implicitly recognises it to be a society-wide confiscation of cash and wealth.

Such hardship will severely affect the middle class, working class and marginalised people. It would accelerate the migration of criminal exchange to bitcoins, which is not in regulators’ interests.

Eliminating cash does reduce the opportunity cost of hoarding it. It allows a level of control when finance ministries seek to collect more tax revenues without raising tax rates.

But the introduction of the euro demonstrates the futility of the recent cash reduction actions to reduce tax dodging. Europeans practiced excessive cash-based tax avoidance for decades before the euro arrived. When forced to exchange their paper currencies, lira, francs, and pesetas, bundles of cash emerged in suitcases to buy other cash-generating assets like real estate. The euro was easier to launder with banks around the world than the individual currencies it replaced.

Fascinating. Never saw Euro introduction from this angle..


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