A Tale of Two Currencies

The two great monetary experiments of the past 10 years have been the euro and the dollar-backed Argentine peso. The euro starts the year celebrating the nearly flawless second stage of its launch. On Jan. 1, euro notes and coins worth $584 billion went into circulation. The peso, once worth the same as the dollar, is opening the year in extraordinary collapse, and the long knives are out for whomever is to blame.

At first glance, it doesn't seem as if the two currencies have much in common. After all, the euro is the newly minted single money for 12 of Europe's richest and most sophisticated nations: The euro zone has 302 million people and a $6 trillion economy. The peso is the currency of 36 million Argentines in an economy that, even before the collapse, was only 1/20 the size of Europe's. Moreover, the peso is now the currency of the world's biggest defaulter on foreign debt.

Yet it wasn't so long ago that Argentina was the darling of the international monetary set. Its unwavering commitment to back every peso issued with a dollar held in the central bank drove a stake through Latin America's most persistent problem--deflating currencies and inflating prices. Argentina earned the exalted status of a hard-money Latin nation, almost a contradiction in terms. Argentines loved the setup. Flush with the mighty peso, they attracted scores of new foreign investors and traveled the world in style, spending--well, like Americans--on Fifth Avenue and the Champs Elysées. So what happened?

Like the euro, the dollar-backed peso was more than just money. It was widely accepted as a down payment on full-scale economic reform. The thinking ran: Get those Argentines hooked on a dollar world, and they'll see the benefits of opening themselves to the free market in many other ways. But those other ways meant facing all the hard reforms: taking on the unions, rooting out corruption, reining in borrowing. Argentina's leaders were having none of that. They kept the party going until the end of this year. Then, kaboom!

The euro, of course, can't crash overnight--because it floats against the dollar. It's already worth 25% less than it was when introduced at $1.17 on Jan. 1, 1999. But the euro's future is also tied to a reform agenda to streamline Europe and make it more efficient. From standardizing tax rates to freeing up labor markets, there is a long way to go.

As our covers on this page show, BusinessWeek has followed the euro and the peso from their promising openings through their current trials. Our Cover Story for Aug. 16, 1999, "Argentina: The unfinished revolution," even then saw the peso experiment heading for big trouble. On July 2, 2001, in "The euro on trial," we noted that--in the absence of reforms--"price, wage, and tax disparities between countries will become glaringly obvious" once the euro is in circulation. This week, our European economics correspondent, David Fairlamb, looks at the euro's impact on Europe's central banks, while Latin American correspondent Geri Smith writes from Buenos Aires on the real meaning of the Argentine collapse. Compelling monetary experiments, with lessons for all of us.

By Bob Dowling, Managing Editor--International

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