It seems likely that developing country citizens will find the euro
an extremely attractive alternative to the dollar given the EU’s size
and location. And if the ECB proves to be as inflation-averse as its
designers intend, the euro inflation rate should be at least as low as
the dollar’s.
What’s more, the ECB plans to issue the euro in large
denominations, including 100, 200 and 500 euro notes. Given the
popularity of large notes in the world underground economy, this
constitutes an aggressive step towards seizing a larger share of the
currency market for the euro, according to Kenneth Rogoff of Princeton
University, writing in Economic Policy. Is this a game the EU
should want to play? And is it one where the United States should seek
to preserve its dominance?
There seems little question that underground demand greatly inflates
OECD central bank balance sheets, and that without it, seigniorage
revenues would be dramatically lower. But, Rogoff argues, the revenue
benefits from catering to the currency needs of the underground economy
may well be an accounting illusion. When lost tax revenues are taken
into account, the net benefits to the government’s balance sheets are
likely to be quite small and perhaps negative.
If removing the convenience of large notes means that even a small
extra percentage of underground activities will be reported, the revenue
gains could easily outweigh any seigniorage costs. In addition, there
are potential savings on law and tax enforcement costs. The best way to
reduce underground currency usage is not entirely clear but, in
Rogoff’s view, eliminating large notes (or placing reporting
requirements on them) is a good place to start.