The Effect of the Euro on the European and US Economies - Research Paper Example

Effect of Euro on the European and the US economies Introduction The Euro is one of the leading currencies in the modern economic system. The Euro is the principal currency for the countries availing the membership of the European Union (EU). The European Central Bank (ECB) regulates it and the Euro is the second most popular currency in the world today. In 2009, 16 countries in the continent of Europe have adopted the currency. The currency started on the concept of the single currency in 1999 when 11 countries agreed to adopt the currency. There were rules and regulations levied by the EU for the countries adopting the Euro. In 1999, the 11 countries started transactions in similar coins and banknotes and the membership for the Euro has increased from that day. (Euro member countries, Euro, n.d.; Introducing the Euro, n.d.). The Euro has grown to be one of the most stable currencies of the world from the days of its inception. The paper deals in an analytical study of the effect of Euro on the European and the US economies. From the days of its introduction, Euro had a substantial effect on the economies of Europe and USA. Therefore, it is important to study the effects in a broader sense and this forms the essence of the report. Euro-effect on the European economy Before the advent of Euro, the countries of Europe had separate currencies. The EU, which had its origins much before the advent of the Euro as a currency, recognized the need for a uniform currency all over the continent. The main aim of the Council was to develop the under developed regions of the continent. The Introduction of the Euro will enable close cooperation between the economies of the continent and resemble a trading block to the other regions of the world. There will be less fluctuations in the economy of the region. The introduction of the Euro in the countries of the continent required to comply with certain rules and regulations. The EU introduced the Growth and the Stability Pact, which underlined the fact that the individual Governments would be responsible for the performance of their economy. (The Scottish Parliament, 28th March, 2002). It can be said that the currency has been useful in developing the state of the economy in the continent. There were debates among the groups who put across points for and against the introduction of the common currency. However, the currency was introduced in 1999 and from its inception, the Euro has been responsible for the development of a stabilized economic system in the continent. However, the direct effects of the Euro on the economic system are difficult to gauge, as there has been numerous changes in the policies of the EU after the introduction of the Euro. One of the most important benefits of the Euro on the European continent is the financial integration. The financial integration is an important part of the modern economy, as this would mean the development of the liquid markets. It is one of the main reasons for the development of the economy of the country with the maximization of benefits to the households and the consumers. It also enables the countries to focus on their area of specialization in production. The Euro has been successful in integrating the economies of the different countries of Europe by the eradication of the exchange rate risk. There has been uniform rules and regulations governing the financial world which has made it possible for smooth transactions in the financial world. Cross border banking has been responsible for the development of trade and commerce in the continent of Europe. The development of the banking system has seen the growth of the international trade in the economy as traders from the other regions of the world find it easy to trade in the region. The introduction of the Euro has increased the financial integration of the countries to the extent of 200%- 300%. This has been possible by the amalgamation of the factors specified above. The Euro has been responsible for the stability of the European economy as the EU keeps a close eye on the economic conditions of the countries. This has led to the increase in the trade volumes, as the traders prefer a stable economy. Therefore, it can be said that the Euro has been responsible for the financial integration of the continent. (Ozcan, 20th June, 2009) The initialization of the Euro has been one of the major forces in the development of the trade and the capital markets of the region. The economic region of the EU has been one of the leading areas of trade and commerce in the world. The IMF stated in March 1999 that the Euro has enabled the countries of the Europe to avoid the turbulence in the financial markets, which had its origination in Asia. However, the introduction of the Euro has been successful in fighting the shocks in the global economy. (Zeppernick, n.d.) The introduction has led to the decrease in the importance of the borders in the continent. The volatility of the prices was a common trait before the Euro was introduced in the year 1999. After the introduction of the currency, the volatility between the borders decreased. However, the volatility of the prices is still more across the borders than within the system. The volatility depends to a large extent on the size of the countries. In the case of the large countries, the volatility is smaller than that of the smaller countries. (Foad, 1st January, 2010). The exchange rates of the Euro in comparison to the US dollars have been constant over the years. The Euro was introduced in 1999 and it sustained the volatility of the market in the first part of 1999 and then began to stabilize. The chart for the exchange rate of the Euro in 1999 is as follows: Source: Oanda The relation of the Euro in comparison to the Euro has stabilized in the recent years making it one of the most stable currencies of the world. This has led to the development of trade and commerce in the area. In the graph below, we can see the exchange rates of 2009. We can see that the performance of the Euro has developed in relation to 1999 and has been largely stable. Source: Oanda Effect on the American economy The USA is one of the most developed economies of the world with large share of the world GDP and exports and imports. Still today, most of the currencies in the world are held in US Dollars. It is the most popular currency of the world. However, the rise of the Euro has posed a new challenge to the US Dollar. The challenge is to sustain the development of the Dollar. The Euro has been able to challenge the dominance of the US Dollar for several reasons. The Euro Zone has been able to increase the trade of the countries by a substantial amount. The economic activities of the countries have also increased. As a result, the GDP of the region has developed. The EU region is one of the most preferred destinations worldwide for trade and commerce due to its openness and the stability of the currency. A recent study on the reserves of the banks reveals that the various countries have increased their reserves by substantial amounts. The increasing oil prices meant that the oil producing countries of the world have increased their reserves. The increase in the reserves has mainly been the result of the current account deficits of the US. The shift in the dollar reserves means that there will be a change in the exchange rates. The change would mean the decrease of the dollar value. The research shows that the banks are increasingly taking Euro as their most ideal currency due to its stability. There has been an increase in the dollar reserves also but the increase in the Euro reserves has been more substantial. However, it has been observed that the increase in the Euro did not have much effect on the Dollar reserves. Instead, it had a detrimental effect on the other currencies like the Yen, Pound and the Swiss Franc. The research also shows that the spread of the Euro currency has decreased substantially which meant that the major currencies of the world are showing more inclination to hold their reserves in the Euro. The emerging markets of the world in India, China, Brazil and Russia have taken into their account a large amount of foreign reserves. The reserves show substantial inclination on the Euro. The increase of the Euro in the reserves of the banks will mean that the countries will move away from Dollar as their preferred reference currency. The preferred currency is that currency which is pegged against the home currency. This puts the dollar dominance in the world economy in doubt. (Nesvisky, n.d.) In addition to these factors, the Euro has challenged the Dollar in another area. The market share of the Euro is increasing substantially because of the issuance of the high value notes. This facilitates trade and commerce in the vast regions of Asia and Europe. Moreover, the location of Europe is suited to the developing markets of Asia, which puts them in an advantageous position. The value of the dollar has been constantly decreasing in the recent years due to the huge deficits. The dollar has become unstable and the Euro gives the traders and the organizations across the world another option of a sustainable currency. The currency is based on the liquid markets of the Europe, which presents a more viable option. Another case in this point is that the Euro zone share of the votes in IMF stands at 23% to that of the USA’s 17%. However, the Euro zone members consist of countries from the EU and also that of the non-EU. Consolidation among the members will mean that the Euro will become the most powerful currency of the world. (Posen, July, 2005) Conclusions It can be inferred from the above discussion that with the emergence of the Euro, the region of Europe has developed immensely. The trade and commerce of the region has increased. The introduction of the Euro as the currency in the EU has made it possible to trade with countries of the regions without much volatility in the prices. The trade with the outside world has also increased. The Governing body EU that has made it possible to keep the exchange rates stable supervises the currency. The inflation rate has also been kept in check. More and more countries of the world prefer Euro for their mode of transactions. The initialization of the Euro had a negative outcome on the US Dollar. The Dollar has been unstable and people are finding it difficult for trading purposes. With the introduction of the Euro, people have the option of another currency, which has high liquidity. The Euro has become popular all over the world. It can be said that if the policies of the EU are in accordance with the development of the Euro, the currency will soon overtake Dollar in popularity. References: 1. Euro member countries, Euro. (n.d.). Mr. Paisa.com. Available at: http://www.xe.com/currency/eur-euro (Accessed on 17th March, 2010) 2. Foad, H. (1st January, 2010). Europe without borders. Sage journals online. Available at: http://irx.sagepub.com/cgi/content/abstract/33/1/86 (Accessed on 17th March, 2010) 3. Introducing the Euro. (n.d). Oanda. Available at: http://www.oanda.com/help/euro (Accessed on 17th March, 2010) 4. Nesvisky,M. (n.d.). The impact of the Euro and the prospects of the Dollar. The National Bureau of Economic research. Available at: http://www.nber.org/digest/feb07/w12333.html (Accessed on 17th March, 2010) 5. Posen, A. (July, 2005).The Rise of the Euro: Currency Is Emerging as Rival to the Dollar. Available at: http://www.iie.com/publications/papers/paper.cfm?ResearchID=537 (Accessed on 17th March, 2010) 6. Ozcan, S. (20th June, 2009). What is it good for? Absolutely for financial integration. Vox. Available at: http://www.voxeu.org/index.php?q=node/3671 (Accessed on 17th March, 2010) 7. Oanda. (n.d.). Historical exchange rates: Results. Available at: http://www.oanda.com/currency/historical-rates (Accessed on 17th March, 2010) 8. The Scottish Parliament. (28th March, 2002). The Euro-Background. Available at: http://politicsforpeople.org/business/research/pdf_res_brief/sb02-35.pdf (Accessed on 17th March, 2010) 9. Zeppernick, R. (n.d). Effects of Euro on trade, capital markets and the international monetary system. Available at: http://www.springerlink.com/content/t3147x21m28154n3/ (Accessed on 17th March, 2010) Read More