Economics 26121 Essay

September 18, 1999
The Euro
To most people in the United States hearing the word Euro brings about blank stares. Ask this same question in England or another European country and it means bringing Europe together under one common currency. The Euro can be defined as the common monetary system by which the participating members of the European Community will trade. Eleven countries Germany, France, Spain, Portugal, Ireland, Austria, the Netherlands, Belgium, Luxembourg, Finland and Italy will comprise the European Economic Monetary Union that will set a side their national currency and adopt the Euro in 2002. A new National bank, based in Frankfurt Germany, will be constructed and the interest rates that control the economies of these nations will be in the hands of this new system. It is indeed a great experiment, being masterminded in Frankfurt, one that will be felt through out Europe as well as the rest of the world.1
The combined countries, now more commonly referred to as Euroland, will fall under one national bank. This bank, the European Central Bank, will determine the economic fate of the entire “Union”. The merging of eleven currencies is a daunting and somewhat lethal task. The ECB is comprised of seventeen members, each having one vote within the governing council. What has most Europeans concerned is the ECB’s secrecy of conducting business. There is no voting record nor will there be published minutes of the meeting that take place. Wim Duisenberg president of the ECB and a native Dutchman stated that he wanted the ECB to be one of the most open banks in the world.1 When BBC reporter Steve Levinson confronted him about this in Frankfurt Germany Wim replied
I reconcile these two positions by not defining openness as publishing everything that will be available, but by defining openness as explaining every decision, every consideration. Also the pros and cons and to be very open about that and to be frequent and immediate in that openness. (Livinston, Euroland 3)
Why does the ECB operation so much secrecy? Is does not want economic policy moved by political influence. In January of this year the Bank of Ireland became a regional branch of the ECB. Morris O’Connell, its governor, supports the ECB’s tight lips stating
I don’t think it’s appropriate that you should be announcing how each person may have voted. I think you’re creating other pressures then, you’re creating pressure on individual members to reflect just the national viewpoint. Where we are required under this treaty to take a European perspective on things. (Livinson 5)
This treaty O’Connell refers to is the Maastrich Treaty. It is the foundation for holding together the ECB and the fait of the Euro. It was constructed in such a way that is completely out of reach of the politicians. This way, national views of one country will not effect the entire economic view of the European Economic Monetary Union. One view is certain now, the Euro will happen and the ECB will be driving the train.

What is good for the whole may not be good for the parts. This statement sums up the difficulty of bringing the Euro into reality. Topping the concern is the setting of interest rates through out the EMU. Interest rates normalize any economy and are the foundations of them as well. But does one interest rate in Ireland function the same in Germany? When one economic country is in economic crises how will the ECB react? These are just a few of the many economic problems that will have to be solved, as the day of the Euro becomes closer and closer.

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Both businesses within the European Economic Monetary Union and outside of it as well, will feel the impact of the Euro. Although currency has yet to be coined, today trade using the Euro has begun. The conversion rates have been set for the eleven nations that will partake. If business outside of the EMU thinks that they will be unaffected by the Euro they have a surprise in store. When it fully takes effect all trade for gods and services will be conducted with the Euro. Companies that trade within the EMU will no longer have to worry about costly conversion rates and delays that is inherent when using different currency for business. As far as trade goes there will be no boarders. Countries that refuse to trade in the Euro may have difficulties. At some point in time they will receive payment for goods or services from an EMU country. If they are not prepared to deal with the EURO they will loose business to competitors that are prepared. Part of being prepared is having the financial software that is compatible with the Euro and opening bank accounts so they can transact with Euro currency. England has chosen not to enter the EMU. Many companies within England will not be afforded this luxury. Trading abroad using the Euro will be unavoidable, as many suppliers and business will fall under the EMU. It will be a domino effect, in order for England’s business community to compete with the rest of Europe; they will have to be EURO compliant. One such company in England is Siemens. Siemens is a German based company that is one of the biggest electrical engineering and electronics companies in the world. As far back as 1995 the England based firm started planning for the Euro. Euro project director, Gerard Gent, says “the introduction of the Euro has a very positive step towards economic conditions in Europe and the global competitiveness of the region” (Euro case study: Siemens 1). Many areas had to be considered from a business focal point, “they tackled a variety of…areas including…purchasing, accounting…and data processing” (2). One of the major concerns now is being able to convince their suppliers to be Euro compliant. As of now no supplier or business is being forced to prepare for the new currency but it is highly recommend. Some suppliers may be dropped in order to keep operations running smoothly leaving behind the hassles of dealing outside the Euro. Whether or not a business lies within the EMU running into the Euro will be inevitable as time passes.

Traveling in Europe will be less of a hassle in regards to exchanging currency. For the time being people have the choice to disregard the single currency until 2002 or they can embrace it and possibly save some money.2 Almost all businesses are displaying Euro prices next to the national currency. Travelers are then able to instantly see if they are getting their monies worth without the need to use a calculator to convert currencies. Pricing will be consistent throughout the EMU. People will be able to compare the prices of similar items in different countries of the eurozone.2 Also people will not have the worry about of useless currency when crossing boarders. The Euro will be legal tender throughout the EMU. For example, the Euro check will be exchangeable into any of the currencies within the “eurozone”.2 When they use Deutschmark checks within Germany they pay no exchange fees. However, when they cash these checks in Paris France exchange fees will apply An Euro check will be directly exchangeable with no exchange fees all around the eurozone.2 Other than seeing Euro figures on their statements business travels will not see much difference when traveling with the Euro. Regardless of whether travelers will be crossing the region or on their annual package vacation travel around the EMU will be different.

With the introduction of the Euro major changes will take place to the international monetary system. The European Monetary Union, EMU, will create an area that will closely resemble the Untied States in terms of magnitude of its domestic economy and its degree of openness.3 Accounting for about 18% of the world gross domestic product it mirrors the United States 18% as well. The eurozone accounts for 20% of world exports against 16% for the United States and 10% for Japan.3 When imports are worked into the equation the United States holds 19% compared to 16% of the EMU and 7% of Japan.3 Just by these figures the EMU is not just our silent friends across the Atlantic. In order for the Euro to become an international currency strength and stability of the Euro will have to be of essence. Inflation in the area remains low and government deficit are expected to decrease further under the provisions of the Stability and Growth pact.3 America’s net external balance, amounts owed overseas, continues to run large deficits while Europe has a roughly balanced international credit position and runs surpluses in its international accounts.3 (See graphs 1-3 below)
Graph 1 Graph 2
Graph 3
(Graphs copied from AMUE Euro Newsletter No. 33: June 1998)
The Euro financial markets will not only be larger than the current national European markets but also more diversified.3 Compared with the United States and Japan, the weight of equity and debt securities markets is lower and the relative importance of banking is far greater.3 With the implementation of the Euro a new equalization will be created within the global economy. In order for the Euro to become an international currency it will have to become strong and stable. Only these attributes will allow the trust of the global market to vest in the Euro. The stability and strength will have to come from the erouzone and its market, proving the stability of this newfound union.

With the widespread use of the American dollar as an international currency and for holding reserves, it is unlikely that the Euro will replace it as the new international currency anytime soon. Europe does not have a centralized tax system to coincide wit the Euro so it may not be so well suited for a single currency union. Maybe in the future as Europe becomes increasingly integrated will with its economies will it become the new currency standard of the globe. Many see the Euro as a positive development for Europe the United States and world economy.

The European Economic Union will be the most ambitious economic projects undertaken in this century, but it does have its faults. These faults will have to be overcome or at least tamed in order for it to be a success. There are five major concerns that will have to be addressed.

? Sovereignty
? The Central Bank
? Transparency
? Who will be in control?
? Does one size fit all?
Topping the list is the issue of sovereignty.4 Loosing ones national currency is equal to giving up its national sovereignty. The overall position is not whether or not which face will be printed on the currency but is this one step too far down the road leading to political unification?4 Will all of the nation states be engulfed into a European super-state? What could be happening are the beginning stages of the United States of Europe.4 The second issue that is of most concern is the Central Bank. The European Central Bank, which has been conducting most of its business thus far in secrecy, is not winning many points of its constituents. Its seventeen-member council rules the bank. Six of them represent the ECB leadership; the remaining eleven make up the governors and presidents of the national central banks of participating countries.4 Some economists would like to see a more centralized system and argue that the bank is keeping too much power. With a system such as is in place, it might be difficult to react quickly in time of a crisis. One other factor is the built in majority that the individual national banks have, eleven to six, enabling them to gang up on the leadership if the situation presented itself. Thirdly the lack of transparency is of major concern.4 By keeping its proceeding secret the council argues that the threat of political influence is reduced. If no one knows how a particular council member voted then they would not have to be taken to answer for it. Its seems with a policy such as the ECB is only answerable to is itself.4 Financial markets may be excessively nervous because they cannot gauge the governing council’s true thinking. The fourth concern of the implementation of a solitary currency in Europe is that of who is in control?4 Officially the ECB is independent and answers to no political nation. But can one council possibly have the ability to control and balance eleven different economies at the same time? Some say no, but if it can even succeed only a little bit what is good for one economy may not be good for another. This leads into the final concern: Does one economy fit all? When the economy is in the basement the first thing that politicians ask for is a cut in interest rates. In the beginning this may give the desired results but in the long run may entirely destroy an economy. It becomes macroeconomics versus microeconomics.4 What is good for the economy as a whole may not be good for every sector and region.

What one can conclude by the scheme of things that the Euro is going to happen. What the out come will be and what effects it will have towards the economic world can only be speculated. The entire world will be watching as the largest economic experiment of our time unfolds before in front of us half way around the world.


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