The EU’s Euro Problem

April 22nd, 2011

For years economists have talked about the “end of the euro.”  These apocalyptic warnings have become only

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more severe in recent years and months, as the weakening of Europe’s economic and financial position and the debt crises in Portugal, Spain, Greece, and Ireland have triggered discussions of these countries unilaterally dropping the euro.  In truth, however, economists have talked about the end of the euro since the beginning of the euro.  And even after it was formally adopted as the third pillar of the European Union in the Maastricht Treaty of 1992 many economists have remained deeply skeptical.

There are obvious advantages for the collective whole.  The euro improves the flow of intra-European trade, minimizes exchange rate volatility, and saves travelers and businessmen on costly currency exchanges.  There are benefits for individual countries, as well.  Some European countries which traditionally had high levels of public debt have benefited from low inflation and interest rates.  Other countries with traditionally strong currencies hope the Euro possess a slightly weaker, and therefore more favorable to trade, exchange rate.

Among the dozens of arguments about the weaknesses of the euro presented by cynical economists, there is one major disadvantage to the euro, which while not sufficiently strong enough to motivate dissolution, but should be critically important to how we think about a common currency’s advantages and disadvantages.  And that is the euro’s appeal to money launderers.

Certain characteristics are inherent.  The euro is the domestic currency for over 330 million citizens, but is also the encouraged currency in many developing countries that do business in Europe.  As a result of sheer volume of usage the euro and its widespread use throughout Europe, Africa, and the Middle East, it has natural appeal to money launderers.  Moreover, its anonymous nature allows launderers to hide the original location of the crime.  Before the age of the euro, a drug dealer in Spain would have had to change pesetas to dollars, which would have left a clue about the origin of his dirty cash.  With the euro, the currency is automatically separated from the crime.

The euro’s major non-inherent contribution to money laundering is the €500 note, worth about $730 dollars.  The reason is practicality.  With 500-euro bills, about 6 million euros fit in an overnight bag.  Even an internal study by the Bank of Italy has confirmed this hypothesis; the report states: “The wide diffusion of the 500-euro bill is a motive of possible concern in terms of fighting both money laundering and terrorism financing,” because “cash is the ideal tool for illegal payment and movement of funds” and “the high-value banknote simplifies the logistical management of large sums of money.”  According to the European Central Bank (ECB) there are currently 575 million €500 notes in circulation, prompted by the high demand from European businesses.  Unfortunately the pervasiveness of these bills eases the costs of doing business for criminals, as well.

The ECB curtly insists that “issuing high-denomination notes does not in itself encourage underground or illegal transactions.” But as an article in Time magazine points out “the plain truth is that the €500 note facilitates money laundering and cuts the cost of doing business for crooks.” In 2000 the Bank of Canada withdrew its 1,000 dollar “as part of the fight against money laundering and organized crime.”  The ECB might consider doing the same for the €500 note.

I’m not suggesting the European Union should do away with the euro because of the threat it poses to money laundering. The most effective way to combat money laundering remains global, effective cooperation which establish clear and uniform regulations.  I’m not just talking about tax havens here, although they are certainly a large part of the problem.  Countries around the world—including some advanced economies in Europe—must establish consistent minimum standards on regulatory regimes and harmonization of predicate offenses under anti-money laundering laws to achieve effective control of this problem.  In the end, we are as weak as our weakest link.

Written by Ann Hollingshead

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