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N° 1998 - 03 |
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| July |
| The International Role of the Euro |
Agnès Bénassy-Quéré
Benoît Mojon
Armand-Denis Schor |
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The creation of the euro will be a major
change to the International Monetary System, for at least three reasons. Firstly,
the euro will be the currency of a large economic zone and will acquire some of
the fundamental attributes which characterise an international currency. Secondly,
the monetary policy of EMU members will involve a major institutional shift which
could affect the behaviour of the trans-Atlantic exchange rate. Finally, the emergence
of the euro as an international currency, together with institutional changes
and with the strong commitment of the European Central Bank (ECB) to maintain
stable prices, should lead to a shift in the practice of international cooperation.
EMU will constitute a huge shock in the sense that it will suddenly create a large zone with deep financial markets, no intra-zone exchange rate risk and an independent central bank. This shock may override inertia and favour the emergence of the euro as an international currency. Size is important because it determines the absolute amounts of private investment and of public deficit, and subsequently the development of financial markets. In addition, the trade partners of a large zone have an incentive to use the currency of that zone for various functions, especially as a unit of account and as a store of value. However, size by itself will not automatically entail the internationalisation of the euro.
In the long run, the trans-Atlantic exchange rate could also be more unstable, due to reciprocal benign neglect of the Fed and of the ECB with respect to the exchange rate, or to inefficient macroeconomic adjustments in a world with two international currencies. Alternatively, it could be more stable because less currencies in the world will be pegged to the dollar, or because the ECB will not react to shocks affecting two EMU members in opposite ways. The stochastic simulations prepared for this report show that EMU should reduce the variability of the trans-Atlantic exchange rate compared both to the ERM and to a general floating regime.
However, it should be remembered that the finance G-7 never proved effective in co-ordinating fiscal, monetary and exchange rate policies. The difficulties listed above should not be over-stated: concomitant meetings could help to overcome the separation between the G-3 and the G-7, and international co-operation could be strengthened by an appropriate representation of smaller euro countries in the G-7 (towards a finance G-8). But the fact remains that national governments will be unwilling to commit their fiscal policy to an informal international agreement, once it is their only policy instrument left, while the ECB will be incapable of raising resources in case of a large payment crisis, like that of Asia in 1997. |
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