Euro Currency Adoption - Essay Example

Euro is usually used within the Euro region with some exception of a few non-memberscountries. It has had a steady performance since its inception except for some few instances that it has not maintained its track. The performance has however been commendable since 2005 with analysts debating on the possibility of it overtaking the U.S dollar as the world’s most used currency for international exchange. Her adoption as state currencies for other nations has equally risen over the time (Hishow, 2007, p. 3-15). The states intending to adopt the Euro as their currency do so by entering into formal agreements with the European Union member countries. It has also been used in trade negotiations as a pricing tool though not necessarily being used for exchange purposes (Gros, 2011, p.122-123). The inception of a common currency within the European region was not only beneficial to the governments of these countries but was also beneficial to the citizens (Lees and Flowers, 2002, p. 239; Mulhearn, 2008, p.123). Citizens counted on steady prices across the borders, easy transactions and the euro area economy became more unified and integrated. Discussion Economic performance of a trade block depend more on individual countries performance. In our analysis, we intend to evaluate euro’s performance and as such will rely more on the overall activity within member countries. Euro is not political affiliated and thus depend in multi-nation policies regarding the member countries economic performance (Solomon, 1999, p. 141-147). When crisis in economic activity within one trade block occur, the effects easily spill to the global economic and asset market. The European Union, as a trade block, has frequently suffered such (Davidson, Goldstein and Kenny, 2011, p.1; Porter, 2013, p. 1). Global economic crises have also been an effect to be borne by multiple countries. By the analysis of micro as well as macro elements of the economy, we understand and project economic activity within a region. We shall thus use the evaluation to project euro performance within a timeframe. Among other concerns of economic activity for the euro will be individual member currencies and their exchange rates in the world market. This paper intends to carry a critical analysis of the performance of the Euro currency since 2005 to date. The analysis will also analyze the trends that characterize its performance. Explanations to the trends in exchange rates will be based on the price parity trends, the financial market performance, asset market trends and balance of payment effects (Oskooee and Hegerty,2009, p.617-618). Moreover, there shall follow future projections. The links in international financial and asset markets are key determinants of a currency’s exchange rate. Single currency or states supremacy cannot influence the rates that her currencies are accorded. Macroeconomics teaches that multiple factors are put into play in regard to determining a currency’s worth in the international market. Individual states currency is rated on a scale that is unanimously accepted within the trading scope against a common denomination; majorly the U.S dollar, yen or the euro. However, the rates are never constant varying on the prevailing economic performances as determined by the World Bank. ‘Purchasing power parity’ (PPP) compares rates of trade and prices within a state. Projections of future interest rates of a currency relative to nominal interests are determined by the interest rate parity (Cumby and Obstfeld, 1982, 1-2). Therefore, at the macro and micro level performance of an economy, the policies made always have an impact to the valuation of her currency. However, the determination of these indices within an economic block like the EU is not dependent on a single country but rather on sum of the overall economic performance of the economic block. The Euro use has expanded very much within the EU region and is now estimated to be in used throughout seventeen countries. The European Union trade affects the whole global trade by an estimated value of a third. The currency has therefore greatly influenced global market performance (Nesvisky, 2013, p.1). Analysts have therefore reasoned that maintaining a stable euro within the European economic block does not only influence the trade of the area but also the world trade at large. Maintaining a stable exchange unit within a trade block influences trade patterns and is important for the economic growth. When the euro is maintained at a stable level, sustainable public capital and pensions are made available in the country or the trading block. Nevertheless, the euro exchange rate has not been constant over the years. According to Europa (2011. P.1), macroeconomic factors in the economic block have had tremendous effect on the rating of the currency over the year. Major effects on the currency were exerted by the 2008 economic recession and the 2012 debt crisis within the Euro zone. These instabilities led to deficits in current balances of member countries, which directly influenced the performance of the currency at the global financial markets (European central bank, 2012, p.121). Though the great depression of 2008 started from the US and affected severely the dollar, the effects were easily passed over to other currencies of the world by the effect of the exchange rate. The euro exchange rates have thus been fluctuating by the reason of instability by the purchasing power parity and the prevailing external interest rates. A report by Estrada and group (2012, p.1-6) indicate that since its inception, the Euro has shown a gradual but steady performance all through. Its performance in the European Union region showed a steady reduction in employment dispersion over years until 2008. However, in the aftermath of the great depression, the employment dispersion was recorded to have steadily risen even to worse limits beyond those that were experienced at the early stages of its inception. Weak financial governance has been spotted as to have caused the adverse effects that rocked the euro region in the year 2008 and through the financial and economic crises (European Union, 2013, p.1-7). There is the need therefore to maintain a steady state of the euro for trade stability and improved economic performance. Instability in the euro region was evident after the economic recession of 2008. According to European Union (2012, p.1-6), countries within the economic block were unable to suffice their debts from the market uncertainties. The government operations were equally shaken for the government borrowing became more expensive. To restore sanity within the euro region, policies have been devised and are getting implemented. The introduction of the euro was received with joy and positive expectations. The currency performance has been positive all through from 2002.However, survey by Gullup organization in 2006 revealed that the inception and approval had variedly decreased in that year. Coins and notes together served as the currency denominations, which made exchange easy and convenient (2006, p.6-56). However, the report found some reasoning that instead of the euro harmonizing the prices within the euro zone, it partly contributed to price divergence through which there was price rise among commodities within the region. Nevertheless, the introduction and continued use of the currency has led to many citizens enjoying the feeling of oneness within the region. The common currency has brought about integration within the region. The currency’s continued perception of her international standard has continuously attracted other nonmember countries into the block for the perceived future strength of the currency. The currency enjoy her strength especially from the stability pact assented to. The report also indicated a 6% increase of the people who comfortably used the currency between 2005 and 2006. Notable variations in economic performance of the citizens as regarding the use of euro currency were notable between 2005 and 2006. Majorly, the disparities were noted on self-employed people and the women habitual practices. The reception of the change in currency was also different within varying age groups, social classes and educational backgrounds. In this analysis, the report had a survey on the impacts that the introduction of euro currency had on buying habits of the people. The report found out that many sellers adopted the dual pricing mode; whereby two prices were displayed, one in the euro and the other in the local currency. Different views in support and discouragement of the same were given. Majority of the aged and the less literate advocated for the dual pricing while the majority of the elite and the young reasoned that dual pricing often caused confusion in decision-making. Many of the users of the currency in2006 believed that removal of coins and especially the small denominations could have adverse effects especially in pricing of goods. The use of euro currency in travelling outside the euro zone was continuously rising as per the findings of the report in 2006. However, the disparity was explained by the destinations that the respondents were traveling to. Countries such as Austria and Finland often favored their own currency against the euro. Nevertheless, 2006 recorded positive reception of the same. However, the perception was a little lower compared to the previous years. Countries such as Belgium and Luxembourg recorded the greatest variation in the perception as compared to the preceding years. The main advantages expected by adoption of the currency were easy price comparison, travelling made easier and strengthening of the European Union trade block. The major disadvantage that most people sited as regarding the adoption was the possible rise in prices. In the international perception, the euro revealed an increased positive adoption compared to the years past. Comparing the views with the 2005 perceptions, fewer people regarded it otherwise. According to European commission (2006, p.1-66), many euro zone member states were positive about the adoption of a common currency and many supported the opinion of introducing the euro top nonmember states. A report by Ionescu (2009, p.28), indicated positive projections of the effects of the euro on international trade with Rome. The exports from Rome were projected to rise over three times while the imports were projected to rise though at a lower rate. According to a European commission report, 2013, positive trends have been noted as the EU is moving from contraction. Euro has gradually gained the confidence of the trade market her risk decreased in the financial markets. However, poor macroeconomic performance with vulnerable banks within the Euro zone leads to the disastrous 2012 debt crises within the region (Busch, 2012, p.1-15). Nevertheless, the current projection points to a positive trend in the performance owing to the gradual confidence build up from the global economy and the financial markets regarding the euro performance. Many countries, members of the union have already noted increment in economic performance in the first half of the year, which ascertains the positive projection of the report. However, employment forecasts are a little shocking with a negative projection. From the report, unemployment rates continue to be very high within the era region. This leads to a rather constant economic outcome for this year as it were last year. Nevertheless, the overall GDP is projected to fall with a margin. Nevertheless, fiscal and structural policies have been designed to correct this anomaly and restore sanity to the currency. The worst case ever was during the economic crises of 2008 though records indicate the inflation slowly normalizing after 2009(European Commission, 2013, p.4). Following this, the consumer-price inflation is projected to reduce substantially in this year. Conclusion Recent reports by the European commission and other economic services reveal an improved performance of the euro in the recent past. Investor confidence within the euro region has been on the rise, which implies higher investment rates within this region. The euro currency also shows relative strength compared to the dollar and thus projects hire interest rates in the future. Recent business surveys have indicated a steady stabilization of the economic performance in European Union following the gradual recovery from the 2012 debt crisis. The ECB have also posted interest in lowering interest rates in order to woo investors (Compass, 2012/2013, p.10). Through improved economic performance, stock market is greatly influenced. Therefore, a boost in the regional economy within the euro zone is likely to raise the performance of the euro currency within the international stock market. Nevertheless, this must be gradual as many other factors are at play in the determination of general performance of the currency. Global policy development on economic performance is equally very alert to properly design policies to avoid the repeat of past crisis. Bibliography Busch K. (2012). Is the Euro Failing? Structural Problems and Policy Failures Bringing Europe to the Brink. April 2012. 1-15 Retrieved April 23, 2013 from http://library.fes.de/pdf-files/id/ipa/09034.pdf Compass. (2013). Why I Am Reasonably Confident 2013 Outlook. Wealth and Investment Management.Global Research & InvestmentsDecember 2012 / January 2013. 10 Retrieved April 23, 2013 from http://www.barclayswealth.com/Images/us-compass-dec-jan-2012.pdf Cumby R. E. and Obstfeld M. (1982). INTERNATIONAL INTEREST-RATE AND PRICE-LEVEL LINKAGES UNDER FLEXIBLE EXCHANGE RATES: A REVIEW OF RECENT EVIDENCE. NBER Working Paper #921 June 1982. 1-2 Davidson, A, Goldstein, J and Kenny, C. (Nov 30, 2011). Europe’s Financial Crisis, in Plain English.The New York Times. Retrieved fromhttp://www.nytimes.com/2011/12/04/magazine/adam-davidson-european-finance.html?pagewanted=all&_r=0 European Union.(2013). Quarterly report on the euro area. Economic and financial affairs.Volume 12 N. 1 (2013). 1-6 European Union.(2013). European Economic Forecast Winter 2013.EUROPEAN ECONOMY 1|2013. 4 European Commission.(2012). Fostering stability, growth and prosperity across Europe.Economic and monetary union and the euro. 1-6 Retrieved April 23, 2013 from http://europa.eu/pol/emu/flipbook/en/files/economic_and_monetary_union_and_the_euro_en.pdf Estrad A., Galí J. and Salido D.L. Patterns of Convergence and Divergence in the Euro Area. 13th Jacques Polak Annual research conference. November 8-9, 2012. 1-6. Retrieved April 23, 2013 from http://www.imf.org/external/np/res/seminars/2012/arc/pdf/ELS.pdf European Central Bank. (2012). Financial Stability Review, 2012. Retrieved April 24, 2013 from http://www.ecb.int/pub/pdf/other/financialstabilityreview201206en.pdf Europa.(2011). Exchange rate mechanism (ERM II) between the euro and participating national currencies. Retrieved on April 23,2013 from http://europa.eu/legislation_summaries/economic_and_monetary_affairs/institutional_and_economic_framework/l25082_en.htm Gros.D. (2011).Whither Macroeconomic Stability inEurope? Retrieved on April 23, 2013 from http://www.ceps.eu/system/files/article/2011/06/Editorial.pdf Gullup. (2006). The euro zone, 5 years after the introduction of euro coins and banknotes. Analytical report.6-56 Hishow, O. (August 13, 2007). The effect of the common currency on Europe’s economic integration.Working Paper, Research Unit EU intergration. Retrieved on April 23,2013 from http://www.swp-berlin.org/fileadmin/contents/products/arbeitspapiere/Euro_KSneuformatiert.pdf Ionescu R.V. (2009). The international trade as an element of the sustainable development. Euro Economica. Issue 2(23)/2009. 28 Lees, F and Flowers E. (2002). The Euro, Capital Markets and Dollarization. Lanham, Maryland: Rowman& Littlefield. Mulhearn, C., J. (2008). The Euro: Its Origins, Development and Prospects.Camberley: Edward Elgar Nesvisky, M. (2013). The Impact of the Euro and Prospects for the Dollar.The National bureau of Economic Research. Retrieved on April 23,2013 from http://www.nber.org/digest/feb07/w12333.html Oskooee M. B.andHegerty S.W. (2009). Purchasing Power Parity In Less-Developed And Transition Economies: A Review Paper. University of Wisconsin-Milwaukee,Milwaukee, Wisconsin. 617-618 Porter, E. (April 23, 2013), Economists Agree: Solutions Are Elusive. The New York Times. Retrieved from http://www.nytimes.com/2013/04/24/business/solutions-remain-elusive-after-financial-crisis.html?ref=europeansovereigndebtcrisis Solomon, R. The Birth of the euro and its effect; The Brown Journal of World Affairs. 1999(6)2 pp. 141-147 Read More