themselves. In 1989, the European Monetary Union (EMU) was proposed by the chairman of the EU Commission, Jacques Delors. The proposal was accepted in 1991 (Estrada, Wechsler). The Euro was introduced to keep the interest and inflation rate consistent across Europe for improving trade and economic relations between EU nations to make Europe a major economic power. Arrival of the Euro January 1999 saw the advent of a new currency to be used in most of Western Europe – the Euro. Introduced by the European Union to promote trade and commerce, the Euro has replaced the national currencies of over a dozen Western countries (Estrada, Wechsler).
Euro was introduced in 1999, but a three year transition period was granted by the European Commission to the countries adopting the euro – from January 1, 1999 to January 1 2002. In 2002, euro coins and notes came into the use of the common man. The European economy being one of the strongest in the world is the major motivation for businesses, big and small, to adapt themselves to Euro, if they want to continue doing direct business with Europe.
Unpredictability in the exchange rates was greatly reduced between the member countries after the adoption of euro, making them essentially one big economic entity. Big and small businesses find this huge European market with relatively stable exchange rates as compared to the rest of the world in which almost all countries have their own national currencies and therefore different exchange rates, a much more attractive market. Requirements to Become a Euro Member Certain conditions were established for becoming members of European Monetary System (EMU) formed by the European Union (EU) to keep the rate of inflation and interest consistent across European countries.
The detail of the criteria potential members were to meet are as follows (Wikipedia. com): “budget deficit of less than 3% of GDP, a debt ratio of less than 60% of GDP, combined with low inflation and interest rates close to the EU average”. Countries that have met these conditions became members of euro. They are: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxemburg, Netherlands, Portugal and Spain. Greece was the only country, which was denied membership because it did not meet the criteria. Of the limited participants in the monetary union, eleven of the fifteen European
Union countries are members of the EMU. Greece could not meet the convergence criteria and did not gain the membership, making it the sole EU nation to be denied membership (Solomon). UK, Sweden and Denmark preferred not to adopt the Euro. Eventually, Greece was granted membership after two years of the introduction of euro. Andorra, Monaco, San Marino, Vatican City have also adopted the euro after the approval of the European Union although they are not EU members. Advantages and Disadvantages The advantages of using a single currency are as follows (Frieden):
* Member countries, which become one economic country, will be able to assist other members in overcoming their economic woes and thus a financially stronger Euro-zone will be formed * Major corporations strongly support the idea of a single currency as its opens up a new, huge and stable market for them. * A single currency will improve trade between member countries; therefore improving their economies and difference in price levels across the countries will be reduced (wikipedia. com). The major downsides to adopting a common currency along many disparate countries are as follows:
* Political turmoil if the monetary policy pursued by the ECB is not acceptable and beneficial to every member. * Moreover, the economic conditions in each country are different and a single common monetary policy may not be able to satisfy the different conditions and constraints (wikipedia. com). Whether the advantages will prevail over the disadvantages, only time and Euros acceptance (over the USD) worldwide will tell. Euro is expected to make its eleven member countries a single, strong and stable economic being.
Relatively less unpredictability is exchange rates and controlled inflation due to the adoption of euro is expected to make Euro land a lucrative market for businesses. Businesses when attracted by the huge stable market would invest big money in Eurozone, consequently making Euro land a more powerful economic power in the global financial systems. Threats to Euro and the probability of collapse Members of Euro-land are not economic equals (Frieden). They have different financial constraints and economic priorities. A monetary policy beneficial for one member may become detrimental to the interests of another. For instance, a strong euro can reduce the price of Europe’s imports.
This would spell disaster for Portuguese knitwear manufacturers. The European Central Bank may not agree to weaken the euro as the strong currency maybe benefiting other nations. Such a situation could lead to major political and economic conflicts where one party may end up perceiving itself a victim. The political ramifications of such conflicts might well result in the collapse of the euro, if member nations pull out. European Central Bank European Central Bank is one of the most independent central banks on the planet (Bibow). Its primary objective is ensuring price steadiness by establishing a balanced monetary policy among all euro member nations.
ECB supported Euro when it was introduced, and some analysts say that could be the reason for Euros downfall – slow economic growth resulting from disturbing the euro from its equilibrium because expectations were too high from the currency at the time of its introduction. Who determines exchange rate policy for Euro land? The exchange rates (Wikipedia) for member countries were established by European Central Bank on the basis of market rates on December 31, 1998. One European Currency Unit (ECU) equals one euro.
The exchange rate at which various national currencies initially converted into the euro is as follows (Wikipedia): q 13. 7603 Austrian Schilling (ATS) q 40. 3399 Belgian Franc (BEF) q 2. 20371 Dutch Guilder (NLG) q 5. 94573 Finnish Markka (FIM) q 6. 55957 French Franc (FRF) q 1. 95583 German Mark (DEM) q 340. 750 Greek Drachma (GRD) q 0. 787564 Irish Punt (IEP) q 1936. 27 Italian Lira (ITL) q 40. 3399 Luxembourg Franc (LUF) q 200. 482 Portuguese Escudo (PTE) q 166. 386 Spanish Peseta (ESP) q 340. 750 Greek Drachmas (GRD) per euro All figures taken from Wikipedia. com.
Factors determining Euros strength and how it affects the business world The confidence of having the backing of big business corporations is the major strength behind the euro. Euro has made the euro members one economic entity and hence one huge market, which is highly attractive for foreign investors. Euro Vs. US Dollar Until recently, the dollar was considered the strongest currency and the default currency for the world (Landler, May 18, 2003). Yet with Euro gaining considerable ground in many countries, the future of both the euro and the dollar is undecided. The first issue is that the strength of the euro is directly proportionate to the strength of the dollar. On July 15, 2002, the euro became higher in value than the American dollar, which showed the strength of the euro.
However, analysts point out that the surge seen at this time was actually more due to a decline in the dollar than a stronger euro (Erlanger, July 16, 2002). A later surge, in May of 2003, was sparked by comments from the United States Treasury director stating that the decline in the dollar "really is a fairly modest realignment of currencies. " (Landler, May 20, 2003). Any weakness, either perceived or real, in the strength of the U. S. dollar will likely cause a rise in the euro. In response to a rising euro, some European companies will lose money, including those companies acting as exporters.
These companies pay for materials in euros, which means a higher cost of production. Their revenues are based on dollars, meaning a lower revenue base. As the dollar euro rises, their revenues fall short (Tagliabue, June 10, 2003). Conversely, U. S. exporters enjoy the benefits of a higher euro. As dollar prices fall, they are able to sell goods abroad at a lower cost than their foreign rivals, making a more competitive market. Exporters to countries using the euro enjoy, at least temporarily, a higher profit margin. As the dollar weakens, the euro rises, causing an increase in profit for those companies (Tagliabue, June 10, 2003).
The impact of a strong euro on both Europe and the United States can also be seen in the import industry. For European countries, a strong euro means lower costs of goods. Since the dollar and euro are conversely related in value, a higher euro means a lower dollar. As the euro rises in value, the amount of goods sold for these importers also rises. This means their cost of goods sold increases, while their revenue decreases (Tagliabue, June 10, 2003).
Conversely, the United States import industry is affected negatively by the rise in the euro. When the value of the euro rises, costs of goods sold rise in response. This means that while materials purchased in euros is high, the dollar value of those items is lowered. Again, U. S. importers see a drop in revenue from the rising euro (Tagliabue, June 10, 2003). These effects are reversed with a rising American dollar. As the dollar rises, European importers stand to lose money, while their exporters stand to gain revenue. For the U. S. markets, a rise in the dollar means higher costs of exports, and lower costs of imports. A higher dollar value means that companies and others pay more for services and goods invoiced in U. S. currency (Tagliabue, June 10, 2003).
The future of the euro and the dollar is unclear. While the American dollar remains the default currency for most of the world, the euro is certainly gaining support. In all, 12 European countries use the euro, with another 3 countries not far behind. In addition, the southeast Asian countries and many Muslim countries are switching slowly to the euro in order to have less dependence on the American dollar (Landler, May 18, 2003).
One prime example of this shift can be seen in the global bond market. From 1995 to 1999, 53 percent of all corporate bonds were issued in dollars. Conversely, only 20 percent of bonds were issued in currencies of countries now representing the euro. However, in the last few years, 44 percent of bonds issued were issued in the euro, almost matching the 48 percent issued in American dollars (Landler, May 18, 2003). Some analysts believe the euro will eventually match the dollar.
By simple math, the euro has 300 million supporters, and will increase to 450 million if the other 3 countries adopt it. Since most European countries not already using the euro believe they will eventually move to it, once the strict limitations of its financial rules are lessened, this equates to an enormous backing in the population (Landler, May 18, 2003). However, the euro is seeing some less in favor of the dollar. For most countries, using the dollar increases their exports, a primary source of revenue for many. In addition, countries with an already strong currency stand to lose if conversion is made, and the euro drops in value again (Landler, May 18, 2003). Euros effect on European and foreign markets The effects of the euro on the American dollar are undeniable. With the weakness of the dollar increasing due to twin deficits, those of trade and in budget, and with stock markets at a low, damaging the enticement of foreign investment, the euro will continue to rise.
However, while analysts are seeing a changeover to euro investments, most of those appear to be short term. As a major import and export country, the U. S. is too vital to the global market to allow the dollar to collapse, and once the U. S. recession is over, analysts predict a comeback for the dollar (Erlanger, July 16, 2002). All eleven-member states can be considered one huge, lucrative and fairly predictable market as far as inflation, price levels and exchange rates are concerned.
This in turn makes the foreign markets seem unpredictable and therefore less attractive in comparison, to commercial players. Euro may affect oil prices worldwide. Though same in size to the US, which uses a single currency, Euro land’s requirement for oil is higher (wikipedia. com). This forces the OPEC countries to do business in euro whereas they determine the oil prices in US Dollars. OPEC countries are considering pricing oil in euro because euro currency is what they earn the most. This could benefit Euro land as it could now buy oil at reduced rates, which America used to in the past.
Who will benefit from the Euro and who will not Euro land’s adoption of the euro would reduce the risk of exchange rate variability (Delianedis, Santa-Clara). Eurozone’s companies can borrow without risking dramatic changes in exchange rates, therefore they stand to benefit a lot from the adoption of Euro. Commercial businesses targeting the Eurozone could be major winners. A strong euro would make life easier for European financers (Frieden) as their services will be required once euro starts commanding businesses’ confidence globally like the USD does. American financial institutions may lose their business to their
European counterparts if this happens. If OPEC starts pricing fuel in euro instead of USD, America may lose out on oil price rebates it currently enjoys, to Eurozone. Strategic, technical and accounting challenges presented by the Euro to businesses If a firm intends to do business in Euro, it would have to consider some serious changes (Estrada). The accounting systems will have to record and tabulate sales and purchases in Euro and dollar amounts simultaneously. T–accounts would have to be created in both dollars and euros to be able to track partial payments. The value of dollar
against euro would have to be constantly watched to make necessary currency conversions. All automated accounting software packages would have to deal with euro and dollar simultaneously. A new key of the euro symbol would have to be added on computer keyboards. If the euro gains worldwide acceptance and confidence, Europe will emerge as a significant economic power and a threat to many nations.
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“In Europe, 2 Sides to Weak Dollar”. New York Times, 10 June, 2003. Anette W. Estrada, Sandler S. Wechsler. Are you Euro-fluent? Journal of Accountancy. Volume: 187, pn. 22 Issue: 6, 1999. Gordon Delianedis and Pedro Santa-Clara. The exposure of International corporate bond returns to exchange rate risk. Oxford University Press, 1999. Jeffry Frieden. The euro: Who wins, who loses? Foreign Policy. Fall 1998. Wikipedia. Accessed from http://en. wikipedia. org/wiki/Euro on January 11, 2008 Jorg Bibow. The euro: market failure or central bank failure. Journal Title: Challenge. Volume: 45. Issue: 3 , 2002.