Some countries like China believe that to make the economy smooth and more usable the most desirable approach would be the implementation of a single world currency. At present, the Euro acts as a common single currency for Europe and it is supposed to be the most desirable currency in Europe. Thus, it is important to evaluate the merits of the Euro as a single European currency to understand the feasibility of a single world currency.
History of EMS (European Monetary System)
The European Monetary System (EMS) is significant in projecting a furthered dynamic European identity. Thus, it is of much importance to analyze its influence on the international economic structure. (Ingham 2004) The economic span of the EU includes over 300 million people and generates a gross domestic product (GDP) larger than the United States. The EU is the world’s largest trading cohort, but nearly two-thirds of international dealings entail the U.S. dollar. The EMS has its effects on these relationships. Due to several factors, the progress of the EMS connotes a depletion of the supremacy of the U.S. dollar in the international economy. By supplanting 11 European currencies, the euro assumes importance as an international reserve currency. More notably, the lack of transaction costs, exchange rate risks, and interest rate spread across the EU enhance the progress of a truly incorporated financial market (Alan, 2007).
The European Union (EU) is a political and economic union of 27 member states, situated principally in Europe. It was founded as a result of the Treaty of Maastricht in 1993 based on the fundamentals of the pre-existing European Economic Community. With approximately a population of 500 million citizens, the EU collectively generates an approximated 30% share of the global nominal gross domestic product with US$16.8 trillion in 2007. It preserves a common trade policy, agricultural and fisheries policies, and a regional development policy. Fifteen member states have implemented a common currency, the euro. It has built up a role in foreign policy and represents its members in the World Trade Organization, at G8 summits, and the United Nations. Twenty-one EU nations are part of NATO. It has also taken up a responsibility in justice and home affairs, which includes the elimination of passport control between many member nations under the Schengen Agreement. The Treaty of Maastricht enables the citizens of the members to move freely within the boundaries of the member states along with capital, services, and goods. In a word, it acts as a single market (Alan, 2007).
ECU (European Currency Unit)
Owing to different national norms for rounding and significant digits, all transitions between the national currencies were achieved using the process of triangulation via the euro. (Ingham 2004) The Council of the European Union, based on market rates as of 31 December 1998, such that one ECU (European Currency Unit) would equal one euro, decided the rates. The currency was launched in its non-physical form (travelers’ cheques, electronic transfers, banking, etc.) at midnight on 1 January 1999, when the nationalized currencies of entering countries (the Eurozone) ceased to exist autonomously with their exchange rates being engaged at fixed rates against each other. The physical currencies (notes and coins), however, were used as legal tender until new notes and coins were presented on 1 January 2002. The transformation period during which the previous currencies’ notes and coins were exchanged for those of the euro went on for two months, until 28 February 2002. (Desmond, 2006).
ECB (European Central Bank)
The euro is handled and administered by the Frankfurt-based European Central Bank (ECB) along with the Eurosystem that comprises the central banks of the eurozone countries. As an autonomous central bank, the ECB has singular authority to lay down monetary policy. (Ingham 2004) The Eurosystem is involved in the printing, minting, and distribution of the physical currency amongst member states, and oversees the functioning of the Eurozone payment mechanisms. (Richard, 2006) The EU functions through a supranational approach and a hybrid mechanism of intergovernmental. In particular areas, it relies on agreement among the member states. However, it also possesses supranational bodies, thus is competent to make judgments without agreement between every national government. Among the prominent institutions and bodies of the EU are the European Commission, the European Parliament, the Council of the European Union, the European Council, the European Court of Justice, and the European Central Bank. (Richard, 2006).
The monetary union in Europe came in the form of a single currency embraced by the member’s named Euro. The provisions in the 1992 Maastricht Treaty on European Union, which was used to invoke an economic and monetary union, founded the euro. To partake in the new currency, member states had to meet certain standards such as a budget dearth below three percent of its GDP, a debt ratio under sixty percent of GDP, low inflation, and interest rates nearing the EU average. (Ingham 2004) In the Maastricht Treaty, the United Kingdom and Denmark were exempted from monetary union, which resulted in the creation of the euro. Economists playing a major role in its introduction include Robert Mundell, Wim Duisenberg, Robert Tollison, Neil Dowling, Fred Arditti, and Tommaso Padoa-Schioppa. (Alan, 2007) The euro at present is the authorized currency of fifteen member states of the European Union (EU). The states are collectively known as the Eurozone. As recorded in December 2006 circulation of the euro was above €610 billion, which is equivalent to US$802 billion concerning the exchange rates at the time. The euro boasts about the maximum combined value of cash in circulation in the world, having exceeded the U.S. dollar (USD). According to official estimates of 2008 GDP and purchasing power parity among the various currencies, the Eurozone stands as the second-largest economy in the world. (Richard, 2006).
Relation to Economic Union
The forthcoming of the euro, as the currency of the EU, is of historical importance for both European eco-political amalgamation and the global economic arena. The EMU is metamorphosing into the sphere of business, commerce, and finance. With the economic and political integration of Europe thus expanded, its research with a supranational union has shifted into a new phase. U.S.-European relations are undergoing a period of elementary modification. In the international economic scenario, the uprising of the European Monetary Union (EMU) has generated circumstances for a truly supranational European identity and, eventually, a change in the economic balance of forces between the European Union (EU) and the United States. (Desmond, 2006)
How does EMS work?
Collateral effects are even more reflective and widespread with the euro serving as a vehicle currency (facilitating financial dealings) in foreign exchange markets, and as an invoicing currency in global trade, with increased importance in the role, it plays in capital markets. The induction of the euro into the international market changes the trade and investment relationship. (Simon, 2005) Global economic arena shapes into a tri-polar international financial environment dominated by the U.S. dollar, the European euro, and, to a certain degree, the Japanese yen. The rising of the euro as a major currency makes it more complicated for the United States to guide large external shortages financed by the issue of dollars, due to decreased demand for them. Conversely, the EMS is faced with an easier task to run external deficits without a depreciating currency. Along similar lines, the United States and the EU require cooperative initiatives between the Federal Reserve and the European Central Bank in fiscal policy. (Ben, 2000)
Merits and demerits of the Euro as a single European currency
There are some merits and demerits of the Euro.
The transaction costs are low within the EU
Uncertainty of exchange rate reduced
Removal of revaluation and devaluation
Less likely speculative attacks
Easier price comparison
Loss of independent monetary policy to ECB
Exchange rate policy loss
A limited fiscal policy with a maximum deficit of 3% for a given country
Since its establishment, the Euro has ascertained a single economic currency spread through the provinces, which fall under the jurisdiction of its members. At present, the 15 members of the Eurozone use a single currency. Considered to be a single currency under a single economy, the Euro generated an approximated nominal gross domestic product (GDP) of USD16,830 billion in 2006 that accounted for 31% of the entire global economic output, making it the leading economy in the world in terms of nominal GDP and the second-largest trade bloc financial system in the world by PPP valuation of GDP. It is the leading exporter of goods, the second-largest importer, and the principal trading collaborator to several large nations such as India, and China. (Alan, 2007) Thus, Euro is a highly successful currency and extremely good news for the members of the EU. As a result of this success, the arguments for a world currency hold firm ground.
Alan, C. (2007) ‘Europe at Bay: In the Shadow of US Hegemony’, Boulder Colo.: Lynne Rienner.
Ben, R. (2007) ‘Theories of European Integration’, Basingstoke: Palgrave Macmillan.
Desmond, D. (2006) Origins and Evolution of the European Union, Oxford: Oxford University Press.
Ingham, B. (2004) ‘International economics: a European focus’, NY: FT Prentice Hall.
Richard, B. & Wyplosz, C. (2006) The Economics of European Integration, 2nd edition, London: McGraw Hill.
Simon, H. (2005) The Political System of the European Union, 2nd edition, Basingstoke: Palgrave Macmillan.