Nationalism Trumps Economics

   Central banks and national governments compete to gain an advantage in international trade, partly by manipulating their currency values. Who benefits? Sellers, not buyers.
   A "strong dollar" may sound like a good thing and appeal to patriotism, but to tourists it means they have to spend more. If dollars are "cheap" -- that is, if someone can acquire dollars at a lower cost, then those dollars can be used to buy more America-made stuff. This benefits the seller (the American manufacturer) and the overseas buyer. The American consumer, however, must use more dollars to buy imported stuff -- imports become more expensive.
   So while "strong" is often perceived as a positive, good thing (as opposed to "weak), in international finance it may not be. Why? Because you have to use more dollars to buy the same amount of stuff. If the dollar is "weak" in terms of another currency, you use fewer dollars to make your purchase.


   Some countries, when in economic distress, "devalue" their currencies to their vendors can sell more stuff internationally, and this increase in activity means more jobs for its citizens, making stuff to be exported. The downside is that these workers can't afford imported stuff.
   As long as a nation retains control over its monetary values, it can use devaluation as a strategy to boost its economy. Or it can use other monetary policy measures, such as increasing or decreasing the stock of its money available.
   But when a nation surrenders or otherwise loses control of its money stock -- for instance, joining the European Union and using the euro as a common currency -- the situation can get sticky. By joining the group and using a common currency, a nation also surrenders monetary policy to others in the group. Now, "strong" governments can dictate policy to "weak" nations in economic difficulty. And this is what's happening in parts of Europe today. Not all members of the European Union have this problem, however.    The UK still uses own pound sterling rather than the euro, and thus cannot be dictated to by nations with "strong" economies that do use the euro. "Weaker" members of the 17-nation euro zone, however, -- such as Greece, Cyprus, Spain, Italy and Portugal -- encounter bigger difficulties, as an economically "strong" nation (Germany) puts pressure on them to change their policies.
   Therefore, they face the choice of yielding to the strong EU members nations, or leaving the EU and abandoning the euro.


   The issue is not new. Other nations that have used a stronger nation's currency as a base for its financing, such as Argentina when it used the U.S. dollar, have switched back to their own monetary unit to regain control.
   There are several nations that tie their monetary unit's health to the U.S. dollar and don't issue their own currency. Typically, however, this is voluntary and does not involve political ties.
   But when it comes to international trade and monetary values, nationalism can trump economics.