The Euro Essays - Foreign Exchange Market, Monetary Hegemony

The Euro In Europe, the debut of the euro is widely hailed as the most important event affecting the international monetary landscape since the breakup of the Bretton Woods System in 1971 to 1973, or since the Bretton Woods Agreement in 1944, or maybe even since the founding of the Federal Reserve System in 1913. It has become a contest for European officials and commentators to see who can push the analogy back furthest in time. Eminences elsewhere in the world have similarly greeted the euro with high hopes and great expectations. Only in the United States has the euro been greeted with a yawn. It is not hard to see why. So far, its advent has not weakened the international financial position of the dollar; if anything the opposite has been true. The dollar has been strong against the euro rather than weak; for much of last autumn the fear was that the euro, which had started out being worth well more than a dollar, might plunge through the dreaded psychological barrier of one to one. There has been no sign of Asian and Latin American central banks replacing their dollars with euros en masse, as prominent commentators had predicted. The United States has not had to change the way it does business at Group of Seven summits, the OECD, or the IMF. Many Americans thus cannot help but feel that the euro is a tempest in a teapot. The Euro's Slow Start Perhaps Asian and Latin American central banks have been waiting to dump their dollars until the euro stabilizes. Through much of 1999 the euro was weak because the European economy was weak; governments and private investors were understandably reluctant to overweight a currency that seemed to be losing value by the day. Investors were slow to move into euros because they thought that Europe was less well prepared than the United States for Y2K. They worried about the stability of the European banking system because European banks had lent much more aggressively than their American counterparts to Indonesia, Korea, Malaysia and Thailand. But now that European growth is finally accelerating, the euro could strengthen, and the anticipated shift into euros at last could get under way. Perhaps governments and investors have been reluctant to embrace the euro because of a series of missteps by the European Central Bank. In the early months of 1999, ECB officials issued a series of confusing and contradictory statements, and on several occasions the ECB board's decision on whether or not to raise interest rates leaked to the press in advance of the official announcement. In April the ECB cut interest rates faster than most market participants thought wise in response to signs of weakness in the European economy. Now that the ECB has apparently concluded that less is more (by issuing fewer public statements and moving interest rates less frequently) and has begun to demonstrate the priority it attaches to price stability, skepticism about its ability to act as the steward of a strong currency may be about to fade. Learning to Think European And perhaps it is simply taking time for Europe to learn to speak with one monetary voice. It is understandable that an extended process of acculturation should be required in order for the national central bank governors on the ECB board to learn to think and talk as representatives of Europe and to frame policy with Europe-wide conditions in mind. Similarly, not until well into 1999 was real progress made on reorganizing European representation at G-7, G-10 and OECD meetings. Europe, unlike the United States, has not been able to effectively represent its views on how best to reform the international financial architecture because it is still creating mechanisms for conveying its views and, more importantly, forming those views. Given time, however, this will change. With time, the euro will significantly alter the international monetary and financial landscape. Europe's new money will develop into a serious rival to the dollar as a reserve currency for central banks, an invoicing currency for importers and exporters, and a financial asset for international investors. But this will take more time than suggested even by many euro-skeptics. Because changes in the international monetary and