If Europe uses euros as currency, should then Africa use Afros as currency?
The euro is the official currency of the Eurozone, which is a monetary union consisting of 19 of 28 member states of the European Union. The euro was introduced in 1999 as an accounting currency, but physical coins and banknotes entered into circulation in 2002. The currency is managed by the European Central Bank, based in Frankfurt. Its international code is “EUR”.
Since it is a currency of the second largest economy in the world, the euro gained its position as an international reserve currency. Indeed, it is the second most widely held currency, after the U.S. dollar. However, the European sovereign-debt crisis questioned the soundness of the euro. The problem with the Eurozone (and its currency) is that it consists of several independent governments and one common central bank. Such a unique structure leads to the tragedy of commons: each Eurozone’s member can externalize part of the costs of its deficit and make the whole euro group carry the burden of the costs of irresponsible policies. Therefore, the euro is another fiat money, just like the greenback, but with a flawed and unstable institutional background.
Euro and Gold
The euro is one of the most important alternatives to the U.S. dollar among fiat currencies. This is why there is often a positive link between the euro and gold: both assets have negative correlation to the greenback. However, the relationship is far from being a perfect correlation, as one can see in the chart below. This is because gold is not merely an alternative against the U.S. dollar, but also against the current monetary system based on fiat currencies. Therefore, in some cases the euro and the dollar both lose (or gain) a ground against gold.
Chart 1: The EUR/USD exchange rate (red line, right axis) and the price of gold (yellow line, left axis, London P.M. Fix) from 1999 to April 2020.
And, as the chart below shows, the gold’s performance is similar both in the US dollar and the euro. The dollar-denominated price of gold rose almost six times, while the euro-denominated price of gold surged almost six and half times. It shows that gold is a hedge against depreciation in euro as well as in the US dollar.
Chart 1: The price of gold in the U.S. dollars (green line) and Euros (red line) as index (100 = January 4, 1999) from January 1999 to April 2020.
