Euro, The

BIBLIOGRAPHY

The euro regime is an epochal economic paradigm of supranational macroeconomics, based on a common continental economy with a common currency. On January 1, 1999, eleven of the original fifteen European Union (EU) members (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain) elected to voluntarily surrender their monetary sovereignty and adopt the euro as a common currency, which would be managed by a common central bank, The European Central Bank (ECB). Greece joined the following year. This group of nations, known as the EU12, became the euro regime. Denmark, Sweden, and the United Kingdom have thus far not adopted the euro and each continue to use its own currency. Ten new members were admitted to EU membership in May 2004, and they will join the euro regime when they meet the guidelines of the Maastricht Treaty adopted by the ECB.

The euro began as an accounting unit and came to be a medium of exchange on January 1, 2002. For another twelve months, each member economy was allowed to have joint circulation of their national currency along with the euro. Thereafter, the euro became the exclusive medium of exchange of the euro regime. The new currency soon became the store of value not only for the euro regime, but also for the rest of the world. Holding a part of the GDP (gross domestic product) of an economic unit in money, the most liquid form of asset, is a familiar practice. Because the nation-state economies of the world at the present time hold their international reserves in dollar and euro, each of the two currencies represents overwhelming shares of world output and trade. The competitive shares of official holdings of euros and dollars merit attention. In 1999, the dollar had a 71 percent share of official world holdings of foreign exchange, while the euro began with a nearly 18 percent share. By 2004, reserve values of dollars and euros had been climbing steadily. However, the world share of dollar holdings had fallen by 6.5 percent by 2004, while that of euro shot up by more than 39 percent.

On January 1, 1999, the euro was launched at a 17 percent premium over the dollar, based on the market quotation of the day. Within a year, the euro depreciated to converge with the dollar, and it continued to fluctuate below the value of the dollar until 2002. A psychological attachment to national currencies, as well as their joint circulation with the euro, prevented a significant strengthening of the euro. Soon after the euro became the exclusive medium of exchange of the EU12, it appreciated over the dollar. International uncertainty and terrorism, as well as the mounting national debt and budget and trade deficits of the United States, compromised the competitive value of the dollar vis-à-vis the euro. In addition, fluctuations in the price of both petroleum and gold in the world market (based on and quoted in dollars) have had an impact on the relative strength of the euro. Meanwhile, successive interest rate increases by the U.S. Federal Reserve Bank beginning in 2004 contributed to an increasing demand for the dollar. The ECB responded by raising its core interest rate at the end of 2005. In December 2004, the dollar reached a record low against the euro, falling some 36 percent from its high against the euro in June 2001.

As the EU share of world output and trade has become competitively large, the euro has progressively become a global currency. In 2004, the gross domestic product of the EU12 stood at US$8.2 trillion, compared with US$11.0 trillion in the United States (OECD 2005). In shares of world trade (exports and imports), the euro regime leads the United States by substantive margins. The comparative strength of a currency must relate directly to its shares of world output and trade. Given this criteria, the euro will continue to be a dominant currency. It has been suggested that Denmark, Sweden, and Great Britain will eventually join the euro regime, as will the ten new members of the EU. Then these twenty-five members of the EU (the EU25) will have more competitive shares of world output and trade than the EU12 now has, which will have a significant impact on the euro-dollar exchange rate. In the 1960s, the U.S. dollar, based on a fixed gold value, was king, and its acceptance was global, at least within the free-market economies. Today, the euro and the dollar are the only two competitive global currencies.

The concept of geo-economics has replaced the cold-war concept of geopolitics. Based on the principle of competition, the euro and dollar currency regimes will contribute to the global optimization of economic gains for all micro units (households as units of consumption and businesses as units for investment). The European Union will be a learning model for other continents, and the Asian Economic Community, the African Economic Union, the American Hemispheric Economic Union, and the Free Trade Area of the Americas (FTAA) will increasingly command attention (Dutta 2005, 2007). The African Union has been formally instituted and others are in advanced preparatory stages.

To fully appreciate the role of the euro, one must have a comprehensive understanding of Jean Monnet’s vision of Europe as one common European family (1978). An integrated economy in a continental geographic unit, with well-specified intraregional micro- and macroeconomic parameters, both transparent and judicially enforceable, is now in place. The Free Trade Area of the EU, with one common membership and one vote in the World Trade Organization (WTO), is unique. The euro is common currency for the euro regime, and it will therefore eventually lead to one Europe, to one political union (Issing 1996; Vanthoor 2002).

SEE ALSO Common Market, The; Exchange Rates; Policy, Monetary

BIBLIOGRAPHY

Dutta, Manoranjan. 2005. The Theory of Optimum Currency Area Revisited: Lessons from the Euro/Dollar Competitive Currency Regimes. Journal of Asian Economics 16 (3) 352–375.

Dutta, Manoranjan. 2007. European Union and the Euro Revolution. Amsterdam: Elsevier.

Issing, Otmar. 1996. Europe: Political Union through Common Money. Occasional Paper 98. London: Institute of Economic Affairs.

Monnet, Jean. 1978. Memoirs. London: Collins.

Mundell, Robert 1961. A Theory of Optimum Currency Areas. American Economic Review 51(4), 657–665.

Organisation for Economic Co-operation and Development (OECD). 2005. Economic Survey of the Euro Area, 2005. Paris: OECD.

Vanthoor, Wim F. V. 2002. European Monetary Union since 1848: A Political and Historical Analysis. Cheltenham, U.K.: Edward Elgar.

Manoranjan Dutta