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Author Topic: Enlargement of the eurozone vs EUR price?  (Read 735 times)
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August 03, 2013, 12:14:57 PM
 #1

I live in Latvia, and starting with 01/01/2014 we will have Euro as currency. Our current fiat LVL will be exchanged into EUR by 0,702804.

But does that mean that overall EUR supply in the world gets diluted? Like with money emission - there's simply more fiat of a sudden. I cannot find any data on how many actual LVL is there in the world right now, but even if it were 0.5% of total EUR circulating - wouldn't it drop EUR price by those 0.5%?

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Carlton Banks
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August 03, 2013, 12:35:16 PM
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Short answer is: yes it will increase the monetary base of the Euro.

When, though? Before it was fully introduced to begin with; shop prices, wage statements, bank statements were all displayed in both Euros and the currency of whichever nation state that had adopted the Euro. This happened both before the physical money was introduced, and after. So, when was the inception of the monetary base of the Euro? When the money was in peoples hands, or when it was displayed in bank accounts? I suspect there isn't one clear answer, but I do not know all of the details, just what I've been told in conversation.

So, for new entrants, a similar process, but on a smaller scale, must take place. All Euro bank notes have serial numbers that can be attributed to the nation state from which they were withdrawn. This means that Latvia will have it's own range of serial numbers, if it is to follow the same precedent. Physical money doesn't make up a significant amount of the monetary base, but it is reasonable to assume that the Euro's monetary base will increase at least as much as the required amount of cash for the day-to-day running of Latvia. Whether or not all the money supply from Latvia's previous currency will be replaced with newly created Euros, or some partial amount, I am not sure.

Will it drop the Euro price by 0.5%? It's logical. The markets are not always so logical.

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August 03, 2013, 09:44:47 PM
 #3

No it won't dilute the Euro, because a large number of people (all of Latvia) will now be demanding (in an economic sense) the Euro to conduct their commerce with.  This increased demand will cancel the effects from increased supply, unless your earlier currency had a radically different velocity then the Euro has and this is unlikely as the 'stabilization' period all new Euro zone countries go through tries to bring such things into balance first.  Prior expansions of the Euro zone have had no dilution effect, and they were much large relative expansions then this one.

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August 04, 2013, 06:41:14 AM
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My answer is no, there will be no price increase because of this. The monetary base of Euros will of course increase, that is trivial. I think you should look at it as a buy of Latvian Lat. The central bank is simply buying up all the LVL in circulation and paying with newly issued Euros. The combined monetary base EUR+LVL is unchanged and the price level will stay the same. Latvia has had a fixed exchange rate with the Euro for years now.
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August 04, 2013, 03:34:05 PM
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You have to consider the demand side too: Yes there's more euros, but now euros also buy stuff and labour in your country.

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August 05, 2013, 11:01:13 AM
 #6

I thank you all for such mature answers, good read.

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August 05, 2013, 12:15:54 PM
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There may be a short term price increase in the Euro but as you and others have said they're also increasing the money supply, if they continue to keep printing money as they are then countries entering the Euro zone will mean nothing in the long run because there will be so much money you'll have to trade thousands or millions of the stuff to buy anything.
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August 05, 2013, 10:42:17 PM
 #8

More supply, and also more demand. More people will want euros, more business in euros, there could be more exchanges between Latvia and its neighbors which already use the €. This could make their value go up instead of down.

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