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N° 1996 - 09 |
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| August |
| Potentialities and Opportunities of the
Euro as an International Currency |
| Agnès Bénassy-Quéré |
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| The possible emergence of the Euro as an
international currency has often been underlined as a by-product of European monetary
unification. This report deals with such a possibility both from a positive and
from a normative point of view. In the first section, we take a brief look at
recent figures on the use of international currencies in their various functions.
It is shown that the dollar today remains the most important international currency.
Currency diversification has taken place since 1973, but at a slow pace. Still,
currency diversification is more dynamic for the store-of-value function than
for other functions, which is in line with the removal of most restrictions in
capital flows in the 1980s. The second section argues that the emergence of the
Euro as an international currency will depend on the pegging strategy of third
countries. Actual exchange rate policies are examined through the statistical
and econometric analysis of short run nominal fluctuations and long run real evolutions.
It is shown that most West-European countries are closely pegged to the DM, in
nominal and in real terms, while East-European countries only partially weigh
the DM in their pegging baskets. Finally, most Asian currencies seem to be broadly
pegged in nominal and real terms to the dollar. In the third section, the reason
why East-European currencies may be pegged to the Euro is analysed. A parallel
is drawn with the behaviour of Asian countries vis-a-vis the yen. After reviewing
some key statistics on both regions, a small optimisation model is proposed to
rationalise the choice of a real anchor. We conclude that the emergence of the
Euro as an international anchor may be more likely (on a regional basis) than
that of the yen. Nevertheless, the exchange rate policy of transition countries
as well as East Asian countries will be dependent on the currency-denomination
of capital flows, on the evolution of the distribution of trade, on monetary coordination
around the EMU project (in Europe) or on a multilateral basis (in Asia), and on
size effects. Although a simultaneous development of the Euro and of the yen would
be easier because the narrowing of the dollar market would entail increasing costs
in the transaction of this currency, this scenario is not the most likely. The
last section turns to the costs and benefits of making the Euro an international
currency. The benefits for the EU may not be as large as there are for the US
with the dollar. A simple portfolio model shows that the impact of a multipolar
system on the USD volatility is unclear. Coordination on exchange rates will need
a transformation of the G7 framework. |
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