Tuesday, 1 April 2014

ECB introduces the Real Euro

The European Central Bank today introduces Real Euros for the first time in countries in the European Monetary Union. Real Euros are new Euro notes with an embedded chip that reduces the nominal value of the notes in terms of inflation. During deflation the nominal values appearing on the notes will automatically increase in line with deflation.

This is a way to stabilize the Euro monetary economy in the European Monetary Union. It does away with the real effect of inflation and deflation in the EMU.

For example, during inflation of 2% per annum, the nominal value appearing on a new 100 Real Euro note automatically decreases to 98 Euros.

During deflation of 2% per annum the nominal value appearing on a 100 Real Euro note automatically increases to 102 Euros.

The President of the ECB, Mario Draghi, states that this will keep the value of the Euro money supply stable in real terms in the EMU.

He says that all nominal Euros can be exchanged at banks in Europe as from today for Real Euros.

Economists warn that this will make the effect of deflation even worse in the EMU. People will actually see their money increase in real value and will hang on to the notes even longer (see Japan during deflation) before spending them thus worsening the economy.

On the other hand this will stimulate spending during inflation since people will spend their money sooner - before the Real Euros lose more real value in front of their eyes.

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