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Impacts of the introduction of the euro currency
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Abstract
On January 1, 1999, when eleven nations of the European Union joined together and all shared the same currency this established the world's first common currency, it is known as the Euro. Is this Euro going to be the down fall of the American dollar as a world dominant currency? What are the effects on the United States economy from this overpowering currency? What impact will this have on travelers from the United States to Europe?
The Euro, Effects on America
On January 1, 1999 the world watched as 11 nations of the European Union joined their currencies to each other and established the world's first common currency, the Euro. The creation of the Euro will be the most important development in the international monetary system since the installment of flexible exchange rates in the early 1970's. The dollar will have its first competitor since the it replaced the pound sterling as the world dominant currency.
One of the most addressed topics regarding the Euro is the impact the Euro will have on the United States. Regarding the percentage of dollars held in reserves around the world's central banks. Currently about 60 percent of the reserves held in the world's central banks are held in U.S. dollars, and half of the global trade business is exchanged in U.S. dollars. The powerful Euro will change the percentage of reserve holdings in U.S. dollars, and will become more of a participant in global trade transactions. There was an interview with Chris Giles an associate of (The Financial Times) where he discusses central bankers being less enamored with the U.S. dollar and increasingly attracted to the Euro. Chris Giles states,
There were 65 central banks from around the world who were surveyed, and those are the reserve managers. So these are the people who actually manage their money, that central bank's hold, in case there are financial crises and they have to have money put aside for certain precautions. And they said that though they still very much like the dollar--and at the moment, about 70 to 80 percent of all the money they hold is in the dollar--in the future, they see they will put more money into European assets rather than dollar assets. (National Public Radio,2005,p.1)
There are many reasons that the Euro is becoming more attractive to the investors and to the World's central banks, again Chris Giles states,
In conclusion, the European Union has “merged” the countries of Europe. It has developed a common currency called the Euro’s, and a Parliament located in Belgium, Luxembourg, and France. Also, ALL of the countries of the Union are affected when one country is affected. This is important because the continent of Europe had become very weak after the wars and they needed to strengthen, and the European Union keeps the countries of Europe strong and economically fit.
The European Union today is a political and economic entity that controls in a single market located mostly in Europe exploiting Euro as a single currency uniting the vast majority of its members. The market that all European Union members share provides free trade of goods and services as well as a common external tariff. One might argue that the European Union would not perceptible its current influence had it not been for the introduction of the Euro. Speaking of the benefits of the Euro, one can name the elimination of exchange rate problems, creation of a single financial market, providing price stability, low interest rates as well as being a political symbol of unity and commitment to the Union. Today, Euro is the second reserve currency in the entire world - a fact that clearly speaks for itself of its value in the global market.
The book we are discussing in this essay is called ‘The European Union: Economics, Policy and History’ by Susan Senior Nello. This book takes into account the different disciplines of economics, policy-making and therefore including a great deal of politics, and the history of the institution of the European Union as we know it today. The broad multi-disciplinary perspective makes this a comprehensive book that combines different aspects together making this particularly useful in the current debate about the future of the European Union. The main focus of the book are the policies of the European Union which is the authors’ speciality having worked on various projects for the European Institute in Florence and having advised the European Commission (McGraw – Hill). This book is a good introduction to the on-going debate concerning the progress and developments of the European Economic and Monetary Union. The author does not use a lot of technical terms and if she does they are explained which makes this book perfect as a study-book for students who want to enter this debate and want to be able to carefully structure their arguments. The authors’ main argument is question if the European Economic and Monetary Union is an optimal currency area. Robert A. Mundell is usually seen as the theorist behind the Optimum Currency Area theory. He defines an optimal currency area as “a domain within which exchange rates are fixed.” (177). Susan Senior Nello uses the Optimum Currency Area theory’s criteria whether the European Union is an optimal currency area and addresses what the advantages and disadvantages of being part of a Monetary Union are.
Many people would agree that Europe is a continent in which regions identify with each other even if they are not part of the same country. For that reason, as well as others, in 1957 the Treaty of Rome "declared a common European market as a European objective with the aim of increasing economic prosperity and contributing to 'an ever closer union among the peoples of Europe'" (www.euro.ecb.int). Later, in 1986 and then in 1992, the Single European Act and the Treaty of European Union tried to build on the previous treaty to create a system in Europe in which one currency could eventually be used all over the land under the heading of the Economic and Monetary Union. (www.euro.ecb.int) However, the question remains, why would the leaders of various European nations want to create one currency when the rights of national sovereignty have always been an issue for countries all over the world. Why, in 1998 did they create the European Central Bank, and why in "The third stage of EMU... on 1 January 1999, when the exchange rates of the participating currencies were irrevocably set" (www.euro.ecb.int) did eleven, and later twelve, countries link themselves economically in a way that has never been done before?
The Federal Reserve is the main hub of all the nation’s money while also doing the 5 main tasks we need in order for effective operation of the country’s economic stability. The 1st task is to manage the unemployment rate , create standard prices for goods & seeing where to invest long term interest rates to promote economic growth. Secondly is the minimization of systematic risk due to active monitoring as well as foreign engagement with imports and exports ; this is important because if we invest resources in creating ties with the wrong country , we could end up in economic or even political deficit. The 3rd is to promote & insure the safety of individualized financial institutions & how to properly mentor the effects of their actions on
The end of the World War II marked the beginning of a new era for the world economy. The Bretton Woods System refers to an agreement made at an international conference between 44 nations in 1944 at Bretton Woods, New Hampshire, United States of America (hereby U.S.) on the 22nd of July 1944. It was aimed at maintaining stability in the monetary system in the post World War II period. “In an effort to free international trade and fund postwar reconstruction the member states agreed to fix their exchange rates by tying their currencies to the U.S. dollar.” The fundamental of this system was liberalizing trade policy and promoting free trade. The U.S. dollar was linked to gold as a show of its dependability in the eyes of the rest of the world, $35 equaled 1 ounce of gold. They followed an adjustable fixed exchange rate (1% band). It set up the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which is a part of the World Bank today. Member nations monetary contributions to the setting up of these institutes determined their number of votes as well as their economic prowess
The value of the US dollar relevant to other currencies is a major consideration for the Federal Reserve. If they prevent large changes in the value of the dollar, firms and individuals can comfortably plan ahead to purchase or sell goods abroad.
In fixing the exchange rates, central bank trades domestic and foreign exchange reserves to adjust the money supply such that the domestic interest rate equals the foreign interest rate. Since the Chinese’s foreign exchange reserves mainly compose only of US government and institutional bond, most of our analysis will relate more on the impact of the U.S. economy. The central bank would have a choice to use the monetary policy or fiscal policy to alter the money supply.
The theme of this essay outlines two things. One, the key elements of Bretton woods system and second, the characterisation of Bretton woods system by Ruggie as ‘embedded liberalism’, and how far he succeeds in it. The Bretton woods system is widely referred to the international monetary regime, which prevailed from the end of the World War 2 until the early 1970s. After the end of the World War 2, the need of international monetary framework to boost trade and economic; growth and stability, was important. Taking its name from the site of the 1944 conference, attended by all forty-four allied nations; the Bretton Woods system consisted of four key elements. First, to make a system in which each member nation has to fix or peg his currency exchange rate against the gold or U.S. dollar, as the key currency. Secondly, the free exchange of currencies between countries at the established and fixed exchange rate; plus or minus a one-percent margin. Thirdly, to create an institutional forum, so-called International Monetary Fund (IMF), for the international co-operation on money matters: to set up, stabilize, and watch over exchange rates. Fourth, to remove all the existing exchange controls limiting (protectionism) policies by the members, on the use of its currency for international trade. In practice the first scheme, as well as its later development and final demise, were directly dependent on the preferences and policies of its most powerful member, the United States. According to John Gerard Ruggie, 1982, this Bretton woods system of monetary co-operation represented the type of liberalism which characterise “domestic social economic stability along with a liberal trading order.” He referred this system as ‘embed...
Walker, Bruce. "Euro Likely to Keep Losing Value." The New American. The New American Magazine, 7 July 2010. Web. 23 May 2011. .
Eurozone crisis has had huge impacts not only on the economy of the UE but also on the other countries who have economic and financial relations with the members of the union. The reason why we have decided to examine the Eurozone crisis in detail is to have a better understanding of the mechanisms behind this extremely important and complex problem and also to make accurate inferences about the solution alternatives. In our pape...
believe that the USD will depreciate against EUR and think that it can bear the risk of appreciation
The creation and adoption of the Euro by the EU was a major economic decision that still affects world economies today. The currency of the Euro was first used on January 1st, 1991. This became the new currency for the EU except for the UK, Sweden and Denmark.
There is one thing that differentiates the international business with the domestic business where it uses more than one currency in the commercial transaction. For example, if a company from British purchases some goods from a company from US, the international transaction will require for exchanging pounds and U.S. dollars which involve the foreign exchange market. In the foreign exchange market, any country that wish to do business with foreign country, the country need to convert their domestic currency into the foreign currency that they are wish to cooperate with through foreign exchange.
The U.S. dollar is used in most international transactions, and so what happens to the U.S.A. economy will be affected by the international financial resources.