Essay Example on the Impact of the Euro on the International Economy

2021-06-07 23:06:55
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University of Richmond
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Essay
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The launching of the Euro followed hot debate over its ability to affect the value of the United States dollar as an international currency. While there were different opinions about the same, Fred Bergsten said that creating a single European currency imposed competition to the dollar since dominated the global platform (Almunia, 2). Also, he stated that the political effect of the currency would be significant because the bipolar regime dominated by the United States and Europe with Japan being the junior, would affect the dollar-centered system, which was dominant in the 20th century.

Currently, the Euro is the second most valuable currency behind the United States dollar. This trend has seen significant growth as a currency of issue in the international notes and bonds. Also, the Euro-denominated debt accounts in the international market account for approximately 49% of the remaining stock of the international notes and bonds.

Focusing on the global foreign exchange markets, it is the second most traded and accounts for more than 25% of the turnover worldwide. The current data regarding the composition of the foreign exchange reserves show that it accounts for 26%. Given its dominance, the currency has a critical role in policy decisions in most of the countries. The euro area, as well as the euro are playing an important role to support the stability of the world economy and the financial systems. It contributes to stabilization of numerous macroeconomic and financial variables such as the trade patterns and the value of other foreign currencies (Almunia, 2). To some extent, its stability reduces volatility in the international market. Apart from its benefits, it introduces risks in the money and commodities markets across the world. For instance, during the euro crisis in 2013, there were disruptions in most monetary systems resulting to depreciation and appreciation of other currencies and consequently, the trade balance.

When the euro is compared with the dollar, the latter is stronger regarding its parity. With the uncertainties surrounding the BREXIT, euro has been having less purchasing power, as well as value in comparison to the US dollar. Most of the international corporations have the fear of holding euro-denominated assets because of the vulnerabilities in the European Union(Balakrishnan, 1). On the other hand, the dollar is stronger because of its stability and the incentive of the Federal Reserves to increase the interest rates, and as a result raise the value of the dollar-denominated assets.

An evaluation of the European industrial production shows that something went wrong after the after 2000.Before euro was introduced, production trends were similar across all the countries in Europe. Meanwhile, with the advent of the 2001 economic crisis, the Italian and French output did not recover while the Germany production expanded significantly and recovered immediately after 2008 economic crisis (Durden, 1). Also, the Italian and French economies have been having negative growth since the turmoil. The graph below reflects the changes after the euro was introduced in Europe.

Research studies have established that the countries with the sovereign currencies can easily recover after periods of economic recession because of depreciation since they are strong in comparison to the situation (Durden, 2). On the other hand, Italy, Greece, Portugal, and, Spain have suffered with the introduction of the euro because of their foreign debts, as well as their weak currencies making it difficult for internal consumption to prop up the industrial production.

 

Works Cited

Almunia, Joaquim. "Role For The Euro In The Global Economy". PIIE, 2008, https://piie.com/commentary/speeches-papers/role-euro-global-economy.

Balakrishnan, Anita. "Dollar-Euro Parity: What A One-To-One Exchange Means". CNBC, 2016, http://www.google.com/amp/www.cnbc.com/amp/2015/03/11/dollar-euro-parity-what-a-one-to-one-exchange-means.html.

Durden, Tyler. "Adoption Of The Euro Has Been 'Unequivocally Bad' For Southern European Economies | Zero Hedge". Zerohedge.Com, 2016, http://www.zerohedge.com/news/2016-10-26/adoption-euro-has-been-unequivocally-bad-southern-european-economies

 

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