When economists evaluate and discuss the fate of euro, many ask a question whether the euro should replace the dollar as the world currency. Usually, economic researches indicate that European Union matches United States international trade and financial markets.
Today’s global economic and financial crises have adversely affected the Euro value. The key question remains whether euro will survive the critics and the pressure of the entire Euro states. In fact, the European Union is at task to develop strong financial treaties and guarantees that could enable the currency survive the collapse of European economies.
Some states in the European Union assert for constitutional and treaty reforms to create monetary stability by cementing the volatile money base and recognition of electronic currency in the region. Euro fate in future is usually connected to the European politics and the corruption that erodes its value compared to other currencies, especially the United States dollar currency.
Economist and financial analysts argue that the stability and the value strength of the currency have been a liability and an asset to the members’ states. The euro region lacks measures of flexibility on the currency and the European central bank, which benefits other non-member states.
The paper will bring forth the history of the currency; comparison of the euro versus dollar will also be outlined. In addition, advantages, disadvantages and the current state of the currency will be thrashed out in details. As a conclusion, the ongoing debate over euro future and recommendation of further researches regarding euro fate will be discussed.
Executive summary
Creation of international and regional currencies is influenced by the desire to reduce imports and exports transactions costs. The history of European Union, United States of America, Germany and other countries indicates that there are benefits derived from the international monetary unification (The independent pr. 1).
Usually, histories like the cold war, Soviet Union disagreement with United States, reveal that fiscal federalism and currency on international trade transaction acts as vehicles for development and growth. After the establishment of euro as a single currency in 1999, there was no fear it will challenge US dollar and United States financial markets.
However, as brought up by Frankel, trends of exchange show that euro has acted as a challenger to US dollar. It indicates that euro has a better value than dollar. As the dollar continues to lose its grounds, European countries are benefiting with the attributes of a single currency (pr.1).
Inflations, price stability, economic growth, reduction in transaction cost and filling in economic and financial deficits are among the advantages a single currency present to the European community. On the other hand, the commonality also has its disadvantages.
The crucial idea is that these demerits/costs are outweighed by the advantages of a single currency. To benefit fully from euro European Union need to focus in solving internal wrangles and debates against the union and single currency.
Analysis and discussions
History of the Euro
Money history indicates a growing desire to develop and introduce single currency. Due to international markets, there is an economic political desire to develop a universal currency that can meet demand of international trade. Euro currency history can be traced back after the Second World War.
During the cold war between Soviet Union and the United States, the US dollars increased heavily in other developing countries because of high imports. Many economic territories deposited their reserves in terms of dollars in United States. These countries included the Soviet Union.
In fact, Soviet Union feared that America banks could freeze their deposits due to the cold war and hatred. As a result, British banks were contracted by Soviet Union and its ally to receive deposits from US as international deposits, and the process is believed to be Eurodollar origin.
United States economic deficits and the 1982 economic recession increased the use of Eurodollar. Eurodollar markets expanded gradually for years, which facilitated creation of today’s world Eurocurrency.
The euro was launched in 1999, virtually transacted between European states and other parts of the world. The electronic currency (euro) became legal in the Europe in 2002 where Germany abandoned its Dutch currency to adopt euro. In 2002, euro replaced many of European Union state’s currency.
Value Graph of the Euro against US dollars over the last ten years
According to forecast graphs.com, the euro to dollar exchange rates has been as indicated below. By the year 2012, the economic and financial forecast elements predict exchange rate to be slightly less than 0.7 per dollar (pr.1).
According to Dreyfuss, the euro was up against dollar last week and the part of 2011. This is connected to the increased averse risk in American countries and the decreased speculative risks in European Union (pr.1).
Advantages and Disadvantages of establishing the Euro
Euro went into circulation by the year 2002. The adoption and the establishment of the common euro currency have costs and benefits.
The positive consequences usually outweigh the negative consequences. The major plan for establishing euro currency was to curb increased inflation and ensure prices stability in the international market. Advantages and disadvantages of establishing euro are discussed in the following paragraphs.
One most important advantage associated with the establishment of euro was the reduction and elimination of the need to exchange currencies in the international transactions. Exchange of currencies is viewed to be costly and would only benefit one country at the expense of the other.
Switching to single Euro currency enabled countries save billions of Euros in a year. Transaction costs reduced significantly that enabled individuals save a lot. Exports and imports were liberalized through establishment of one currency and the international markets were opened up increasing balance of payments.
In addition, abolishing exchange to currencies reduced problems of currencies exchange prices volatility. This means that the appreciation and depreciation of the values on states currencies changes significantly. In fact, the only currencies remained for exchange was between the yen, dollars and other non-European countries.
This eradication of exchange fluctuation further resulted to increased production and consumption. Fluctuations before establishment of euro posed risks to producers and consumers incase of imports and exports.
For example, appreciation of one currency value and depreciation of another country’s currency resulted to a loss and gain that was unreasonable. Another advantage is that there were price stability, control level increased and the European Union central bank cannot be influenced by national politics.
Along with the above advantages, consumers and producers were able to accommodate competition, devaluation, revaluation and reduce speculative risks. Before establishment of the Euro currency, countries and companies acted unethically by devaluing their currencies to export more.
Similarly, competitors would do the same increasing speculative risks in imports and exports, which was costly. Speculation risk would force shareholders to sell all shares incase they speculated devaluing of currency. To control speculations, European countries were forced to keep high interest rates.
High interest rates derail economic growth and development, reduce investment and have a huge impact to consumption and output production. Conversely, there were other costs and demerits, which accompanied the above benefits.
Changing European Union to a single currency poses a danger of recession. Regions having single currencies are at a risk of getting into trap of recession where none of its members can assist in economic recovery. In fact, once countries are in recession another country can play a critical role in recovery.
Moreover, European Union was economies were tired together and business cycles gradually become one. (Schwa pr. 1 argues that euro establishment caused change in labor markets policies that prevented glueyness. Countries such as Greece, Italy and France were affected by euro due to decline in production.
Since creation of the single European Union currency, many countries have removed or retaliated on some trade barriers. This becomes a disadvantage in that country’s monetary policies do not match change to trade barriers.
The single currency tied the union monetary policies as one policy. Another disadvantage is that countries need to change their fiscal policies, individuals must adapt to the new currency, which is much costly.
Monetary and fiscal policies act as tools to adjust macroeconomic equilibriums and events. In this regards, economic shocks rose and caused imbalances in production, consumptions, government expenditures and the balance of trade (Schwab pr.3).
Current state of the Euro
The primary objective underlying establishment of a single currency in European Union was to preserve and enhance price stability. Current state of euro is largely influenced by the level of inflation. The single currency has played critical role in counteracting the increase in global prices and discouraging the effects of prices increase to member countries.
Since its establishment, the single currency has facilitated an economic link between European Union states. Economists have continued arguing the present economic events (globe price increase) might put euro at a peril side compared to other world currencies especially the dollar (Wharton Knowledge pr. 1).
Currently, debts crisis are prevailing in states like Greece, Italy and Portugal that raises concerns on the role of euro in reducing fiscal and monetary difficulties to member countries. The currency has gained value to US dollar. Problems currently faced by the currency can be solved by member countries investors purchasing more euro zone bonds as opposed to investing in United States treasuries.
Regardless of its position compared to US dollar, the currency has promoted monetary policy frameworks and price stability in the euro zone. The currency is also praised by member states because it has increased employment level and ultimately social cohesion, financial stability, and political stability has been monitored.
In addition, common currency has helped protect the euro zone economy from the global prices fluctuations and other diverse shocks. Thus, currently euro is considered to stabilize economies and benefits states economic performance.
In nutshell, as indicated by Brussels euro common currency has currently achieved its objectives such as competitiveness monitoring, price stability; suppress diverse global shocks among others (pr.5).
On-going debate over the future of the Euro
As indicated by the graph of euro against the dollar, various debates have erupted both in economic and political fields. According to economists, the ideal objective of forming and establishing European Union single currency is far much eroded by financial crisis in the past decade (The economist pr.1). Political arena observes that, regulations of the euro are not consistent.
The on-going debates argue that the euro future can be compared with futures of cartels. Turner argues that “In theory, the euro is supposed to create a unified economy in Europe through which people, goods and money flow with ease across international borders” (pr.1).
In some respects, that future of Union has been an echoing success. He adds that there has not been a conflict between states, and there is a growing amount of economic teamwork within the euro zone.
Problems in future are deemed to erupt if member states cheat fiscally and act like cartels, European Union will end up breaking. According to Keynesian theories, cartel like behaviors favors some members and disfavors others in expense of the consumers (Trichet pr. 1).
Cartel members need to maximize gains thus a dispute erupts. Current political favor and budget deficits are viewed by economist as signs of downturn. Though the currency has survived for the last 11 years, economists argue that the euro zone may not survive for another decade without some of its members quitting the Union (Wharton Knowledge pr. 1).
This can be supported by the ongoing debate that campaign for Greek to leave the European Union. Decisions to leave or join Greek are politically affiliated but still there are some economic benefits and cost attached to them (The economist pr.1).
Conclusion and Recommendation
The wide spread debates within European Union on its future and the exit of some member states is attributed to political turmoil and financial instability to some states. The current global economic and financial instability have negatively affected the Euro value.
The current debates and performance of euro within European Union reveal that, world monetary affairs denomination; the dollar, is facing fierce competition. Political grounds and economic calculations together with national superpower symbolism will eventually take part.
Comparing the financial markets, economic sizes, and the instruments composition conclude that euro is actually outdoing the dollar in the international markets. Euro’s prospect is particularly linked to the European politics as well as the corruption that degrades its value, in comparison to other currencies especially the U.S dollar currency.
European Union benefits from the economic advantage contributed by the comparative advantage phenomena and the institutions trading thus eliminating exchange rate uncertainty and risks.
The union can solve the current debates that threaten euro future by redesigning monetary policies and fiscal budgets to solve governments’ budget deficits.
Many countries across the globe have sought to avoid internationalization of their currencies. This is because these aspects may bring about conflict between provision of liquidity and the preservation of confidence in their central banks.
European currency can reduce the hysteresis and apathy in the international monetary system to outdo dollar and dominate international markets. Otherwise, global integration of trade and the transition of different monetary systems into global monetary system play a critical part.
Works Cited
Brussels. “Conclusions of the heads of state or government of the euro area.” Annex I. Web.
Dreyfuss, G. Euro flat but trend still positive despite Portugal. New York. Web.
Forecast gragh.com. Euro to dollar exchange rate trend graph. Web.
Frankel, Jeffrey. The euro could surpass the dollar within ten years. Web.
Schwab, Thomas. Advantages and disadvantages of introducing single euro currency. Web.
The economist. Euro Debates. Web.
The independent. Fears for the fate of the euro are much exaggerated. Web.
Trichet, Jean. The euro’s 10th anniversary: history and presence of the euro. Web.
Turner, Elliot. The future of euro. Web.
Wharton Knowledge. (2010). “Crisis in the EU: Is the Future of the Euro at Stake?” Finance and Investment. Web.