The Euro

The Euro In Europe, the debut of the euro is widely hailed as the most important event affecting the international monetary landscape since the breakup of the Bretton Woods System in 1971 to 1973, or since the Bretton Woods Agreement in 1944, or maybe even since the founding of the Federal Reserve System in 1913. It has become a contest for European officials and commentators to see who can push the analogy back furthest in time. Eminences elsewhere in the world have similarly greeted the euro with high hopes and great expectations. Only in the United States has the euro been greeted with a yawn. It is not hard to see why.

So far, its advent has not weakened the international financial position of the dollar; if anything the opposite has been true. The dollar has been strong against the euro rather than weak; for much of last autumn the fear was that the euro, which had started out being worth well more than a dollar, might plunge through the dreaded psychological barrier of one to one. There has been no sign of Asian and Latin American central banks replacing their dollars with euros en masse, as prominent commentators had predicted. The United States has not had to change the way it does business at Group of Seven summits, the OECD, or the IMF. Many Americans thus cannot help but feel that the euro is a tempest in a teapot. The Euro’s Slow Start Perhaps Asian and Latin American central banks have been waiting to dump their dollars until the euro stabilizes. Through much of 1999 the euro was weak because the European economy was weak; governments and private investors were understandably reluctant to overweight a currency that seemed to be losing value by the day.

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Investors were slow to move into euros because they thought that Europe was less well prepared than the United States for Y2K. They worried about the stability of the European banking system because European banks had lent much more aggressively than their American counterparts to Indonesia, Korea, Malaysia and Thailand. But now that European growth is finally accelerating, the euro could strengthen, and the anticipated shift into euros at last could get under way. Perhaps governments and investors have been reluctant to embrace the euro because of a series of missteps by the European Central Bank. In the early months of 1999, ECB officials issued a series of confusing and contradictory statements, and on several occasions the ECB board’s decision on whether or not to raise interest rates leaked to the press in advance of the official announcement. In April the ECB cut interest rates faster than most market participants thought wise in response to signs of weakness in the European economy.

Now that the ECB has apparently concluded that less is more (by issuing fewer public statements and moving interest rates less frequently) and has begun to demonstrate the priority it attaches to price stability, skepticism about its ability to act as the steward of a strong currency may be about to fade. Learning to Think European And perhaps it is simply taking time for Europe to learn to speak with one monetary voice. It is understandable that an extended process of acculturation should be required in order for the national central bank governors on the ECB board to learn to think and talk as representatives of Europe and to frame policy with Europe-wide conditions in mind. Similarly, not until well into 1999 was real progress made on reorganizing European representation at G-7, G-10 and OECD meetings. Europe, unlike the United States, has not been able to effectively represent its views on how best to reform the international financial architecture because it is still creating mechanisms for conveying its views and, more importantly, forming those views. Given time, however, this will change. With time, the euro will significantly alter the international monetary and financial landscape.

Europe’s new money will develop into a serious rival to the dollar as a reserve currency for central banks, an invoicing currency for importers and exporters, and a financial asset for international investors. But this will take more time than suggested even by many euro-skeptics. Because changes in the international monetary and financial landscape tend to occur extremely slow, the exaggerated hopes of euro-enthusiasts like Fidel Castro are likely to be disappointed. Similarly, Europe will eventually learn to speak with one monetary voice. But the political changes needed to make that level of financial solidarity possible will take many years to complete. Just as the dollar will continue to dominate the international financial arena for the foreseeable future, the United States will retain the loudest single voice in international monetary debate. A Rival to the Dollar?n A world where the euro rivaled or even surpassed the dollar would represent a major change from the status quo.

At the moment, the dollar is far and away the leading currency. Aproximily sixty-seven percent of the foreign exchange reserves of central banks around the world are in dollars, compared to less than a quarter of the total for all Euroland– of the 11 E.U. Forty percent of the minor currencies that are pegged to one of their major counterparts are pegged to the U.S. dollar, a far larger percentage than any of its rivals. In one of the articles I also read that the dollar is used to denominate more than half of all private financial transactions. There was an interesting articles which said that Less is known about whose cash is held outside the home country, since much of it is used for purposes like drug smuggling, tax evasion and money laundering.

But the best guess of the Federal Reserve and the German Bundesbank is that perhaps 80 percent of the total is dollars. Those who hope or fear that the euro will quickly rival or overtake the dollar as an international currency point to the size of the European market, which are still growing. The population of Euroland approaches 300 million. The euro area is the single largest importer and exporter in the world, accounting for 19 per cent of world exports, followed by 15 percent for the U.S. and 9 percent for Japan.

Its share of world GDP is 16 per cent, far higher than Japan’s and not very far behind the United States. And as Euroland expands its E.U. member states like Greece, Denmark, Sweden and the UK that are now outside the monetary union decide to participate and the E.U., and also the Eastern European countries if they every decide to join, its share of global GDP will quite possibly surpass that of the United States. Moreover, the euro has created an immense European financial market. With so much economic activity taking place in Europe and so much of it denominated in euros, the euro should become increasingly convenient for use in international transactions by governments, banks and traders in other parts of the world. Increasingly, importers and exporters in Latin America and Asia will invoice their transactions in euros rather than dollars because so many European importers and exporters will be invoicing in euros.

I also believe that multinational corporations and governments will grow even more enthusiastic about denominating their international bond issues in euros, given the large and growing volume of euro-denominated transactions on European securities markets. Latin American and Asian central banks will in the future shift the currency composition of their international reserves from dollars to euros as they see other central banks moving in that direction. Also as the liquidity of European financial markets continues to improve, will begin to shift the eyes of investors around the world towards the shinning euro. . The long future of the euro Let me now try to look ahead towards the long future of the euro and the challenges which the ECB and the Eurosystem will have to address.

Expectations of a long future for the euro seem warranted in light of the increasing confidence of European citizens and international investors in the single currency. The international interest in the euro is extemely evident, An important challenge for both monetary policy and economic policies is to maintain non-inflationary growth in the euro area. In the forthcoming years – I am confident – we will see that the current recovery has extended to become a period of price stability contributing to prolonged employment and output growth throughout the eurozone. However, there are important conditions to be met to achieve a increase in output growth and lower unemployment, which some EU counties suffer from such as Spain. First of all, decisive measures to address the structural problems in Europe, in particular in the area of labour markets, are needed. Second, public finances, which has made considerable progress in the past few years, has to be continued and, where necessary, strengthened.

Yesterday, in a national referendum, the Danes declined to join the European currency union. When a currency plunges in value by nearly 25 percent in 21 months, as the Euro has done, the blame doesn’t lie in faulty ink or paper. It’s to be found in wrong-headed government policies that many European nations have specialized in for years. Such policies have convinced European investors to send their money to the U.S. Last year, what was a trickle early in the decade became a torrent.

Nearly a quarter of a trillion dollars in European money sought a safe haven in American investments. The reasons are: h The European Union confiscates about 42 percent of the region’s total output in taxes to pay for its welfare state — and reduces the value of labor through 4-day work weeks, month-long vacations and generous jobless benefits. h So many Europeans try to escape taxes, underground economies in countries such as Italy, Spain, Portugal, Belgium and Greece equal 22 percent to 30 percent of their total economies. h In all of Europe, some 20 million people work off the books. h Europe’s mammoth tax bite on energy is hitting businesses and citizens hard — and the response has been growing numbers of protests and demonstrations.

By contrast, taxes in the U.S. are nowhere near European levels, at abou …