For the inflation, the chart show quite similar pictures of GDP growth. Of course it is normally good when low inflation, we have normally slow glowth then normally take pressure off from inflation so the prices go down and growth at least get slower. So here we are looing at both U.S and Euro area, they come down in 2009 to much lower leverls of inflation even possibly to negative inflation or deflation in U.S according to the forecast in 2009 year. What is interesting note here in 2008, prices and inflation was quite high due to the shock, we had, oil price shock and even more general high price for lot of commodities from natural resources and etc. So that is all come back down now and global demand and growth has slowed. Therefore, it is expected to have low inflation through 2009 and 2010.
Finally, third indicator is the Unemployment rate. The forecast of unemployment rate arose for both regions in 2009 and 2010. This is to be expected because economy was slowing very sharply. However it is sign of good news for the Euro area that unemployment rate has been declined in recent years, as a result of economy growth and economy reform. For example, 16 millions of job was created in the first 10 years since Euro was launched.
The International Role of the Euro in International Debt Markets
One question that arises when looking at the International Role of the Euro is how the weight of the Euro can be measured. In international debt securities markets, use of the euro occurs in three cases. In the first case, international use of the Euro occurs when an instrument denominated in Euros is issued by a non European Union resident. Who is holding the instrument is not important. In the second case, international use occurs when an instrument is held by a non European Union resident. This is also the most important and frequent case as we will see later. Lastly, use of the Euro occurs when an instrument is both issued and held by a non European Union resident. Until mid-2008 the composition of Euro-denominated debt by residence of holder and issuer showed, that the internationalization of the Euro was still relatively small compared to the domestic markets (European Central Bank, 2009). Instruments issued and held by European Union resident accounted for 74.3% (or €12.603 billion) of total issuance of Euro-denominated debt securities. Within the international use of the Euro, the most important segment, as mentioned before, is the issuance of instruments by EU residents that are then held by non EU residents. This category accounts for €2.118 billion or 12.5% and is about a third larger as the second important international use, issuance of instruments by non EU residents which are then held by EU residents (€1.456 billion or 8.6%). The least important is the case of issuance and holding of instruments by non EU residents, which only accounts for €791 billion or 4.7%.
Another way to measure the importance of the Euro is to analyze the currency composition of the international debt securities markets. When carrying out such an analysis, two indicators can be used. The first is the “global measure”, which is the total outstanding amount of Euro-denominated debt securities that also includes domestic issuance. The second is the “narrow measure”, which is the outstanding amount of Euro-denominated debt securities issued by non European Union residents. This measure can be seen as the more important because it strictly includes only international transactions, but opinions differ since a globally important currency should also be measured by its domestic market (which the global measure includes). When looking at the timeline and the change of the share of the Euro in the international debt securities markets composition, one can see that when the Euro was introduced in 1999 as a book currency it instantly took about 21% of market share (narrow measure). Until mid 2005 this share grew continuously to 35%, its maximum (Amato, 2005), after which it was decreasing again. Recently in 2008, the share grew again in spite of the financial crisis.
The global measure on the other hand only shows a steady rise from about 26% in 1999 to close to 30% until 2008 (Bank of International Settlements, 2010), which can be explained by the much larger amounts and thus leaving the global measure with a smaller volatility than the narrow measure (European Central Bank, 2008). The 15% market share rise (narrow measure) shows that the Euro after its already successful introduction became even more important regarding strictly international transactions. The global measure only shows a 4% market share gain and does not display the importance as clearly as the narrow measure. The current share of the Euro is at 32.2% or €3.098 billion by the narrow measure and with the global measure at 29.5% or €24.601 billion (European Central Bank, 2009). As a conclusion, the Euro captures a third of market share in the international debt securities markets. Although the Dollar is still the most important currency (44% market share, narrow measure), the Euro has in 9 years reached a strong position and is by far the second most important currency in these markets (the Japanese Yen following third with only 6.8% market share, narrow measure).
Only looking at the currency composition does not show the whole picture though. A geographical breakdown of the international use of the Euro in international debt securities gives a more comprehensive understanding. As can be seen, the Euro has a very strong regional importance in central and eastern European EU countries and large non Euro EU member countries (Denmark, Sweden, and UK), as well as in North America and to a certain degree in Africa (European Central Bank, 2009). But in Asia and the Pacific region, concerning offshore centers, Latin America and the Middle East, the Euro plays only a minor role in international transactions. This shows, that although the share of the Euro by the global and narrow measure captures almost a third of the international debt securities markets, the use is more limited geographically to the EU area and neighboring countries and regions than suspected with the measurements mentioned before.
Turning now from the international debt securities markets to the international loan markets, one has to notice a different currency distribution. The share of the Euro in these markets has since 1999 been around 20%, leaving the Dollar at around 55%. The Yen again is the third strongest, but lost market share compared to the Euro since 2000 (European Central Bank, 2009).
When looking at the actual amounts, we can see a steady rise until 2007, after which the total amount in the loan markets saw a drop due to the financial crisis. Also, generally greater risk aversion, an uncertain economic outlook and shortage of funding were drivers for the development in 2008 (European Central Bank, 2009). The currency distribution, though, stayed roughly the same for the Euro, Dollar, yen and others. The Euro’s role, thus, is not as important as we saw in the international debt securities markets, accounting only for about one fifth of the volume.
The international deposit markets were also undergoing similar developments as the international loan markets. In 2008, they were also hit by a decrease in total volume. The Euro’s share was higher than in the international loan markets, at close to 30% until 2005.
After that, the Euro lost market share until 2007 to the Dollar, which increased from around 53% to about 60% in 2008. In 2008 the Euro also showed a small upward trend, recovering to around 22% (European Central Bank, 2009).
The International Role of the Euro in International Trade
The primary goal of introducing the euro nearly ten years ago was to achieve a higher level of economic integration within the European single market and to promote both economic growth and stability. The US dollar still is the dominant currency in international trade transactions, but the euro has gained substantial ground since its intention ten years ago. The role of the euro has expanded its influence as a vehicle currency within the process of trade among intra- and inter-national regions.
Coupled with the introduction of euro aimed at the greater economic benefits in general, its anticipated effects in terms of trade gains are to intensify the commercial relations between member countries through expanding the volume of trade. By promoting a deeper integration resulted in an elimination of barriers to trade such as reducing the exchange risks and the costs of changing currencies within the European Union, many previous literatures continued to find large trade effects from currency union.
According to the table given by Faruqee’s IMF Working Paper, the trends in Euro area goods and services has been underscored and proved a pattern of positive growth in last ten years. It is definite that euro area countries have continued to determine the choice of currency in which international trade is invoiced as the euro and expand the use of the euro with countries outside the euro area; yet how about the trade involving third countries which are outside the euro area?
Since a number of studies has diagnosed and proved with the positive effect of the euro on trade in terms of the amount changed before and after, it is important for now to focus instead on how the currency actually affects the trade. Interestingly among many determinants of currency denomination of trade, the euro’s share in the settlement and invoicing of merchandise trade has greatly been determined by a geographical factor. The intriguing aspect of the international role of the euro especially on the global trade is that the role maintains a strong regional pattern. Thereby with the euro zones, the closer a nation is geographically located from the euro area the easier it involves in using the euro as a currency of transaction. According to the ECB report of 2009, it is noted that even within the third countries outside of euro-zone, the levels of euro usage as a trading currency are different according to the geographical reason which also closely relates to the issue of the existence of network externalities in international trade. The network externalities typifies the effect that one user of a good or service has on the value of that product to other people. In other words, the value of a product or service, in this case the euro as a transaction currency, amplifies as more people use it when the network externalities present.
For example, the share of the euro in the invoicing or settlement of trade significantly increased in case of Slovakia which is being geographically close to other nations using the euro. On the contrary, however, Cyprus which rather has more strong trade relations with the United Kingdom denoted that its relatively low share of the euro as the invoicing and settlement currencies is due to its unclose geographical location to the euro area. The EDB reports of 2009 concluded the reason for this pattern for Cyprus is that the adoption of the euro alone was insufficient to trigger a shift in the currency denomination of trade flows with non-euro are countries to the euro.
The Euro in Third Countries
Besides the trade relation, the broader picture of the role of the euro in third countries can be described with two main uses: the official use as foreign exchange reserves and the private use as parallel currency. The 2009 ECB reports announced that the share of the euro in global foreign exchange reserves has steadily increased and reached a peak at 2008. Meanwhile the percentage of share of US dollar-denominated reserves actually decreased relatively. This markedly increasing share of the euro in third countries as foreign exchange reserves could be possibly achieved due to the microeconomic factors such as an increasing trade with the euro area simply or the macroeconomic reasons such as a shift towards exchange rate arrangements using the euro as a point of reference and an increasing weight of the euro in the denomination of external debt.
The private use of the euro in currency and asset substitution remarkably increased outside the euro area as well as reported by the 2009 ECB reports. During the review period of 2008, increasing demand of euro banknotes outside the euro area, especially by non-residents living under an uncertain financial environment, was critical to raise the private use of the euro as a currency substitution. The main reasons for the nations outside the euro area to consider holding more of euro banknotes are first off the purchasing power in euro area countries and the storage value secondly according to the ECB reports. Even not only the countries located within the European proximity, but the region of Asia also seems to prefer demanding the euro banknotes considerably for purchasing goods and services owing to trade and tourism in euro area countries.
The second concern of people in third countries is to prepare for what to come in the future. They expect the euro itself will be having a higher value in a few years in the global market, so they demand more euro in the expectation of storing higher currency value.
Another private use of the euro is in asset substitution. During the review period for the 2009 ECB reports, the share of the euro in total foreign currency deposits for domestic financial transactions increased in most EU Member States which are yet to be euro area and EU candidate countries. The 2009 ECB reports measures two distinguished uses of the euro in the denomination of deposits and loans in third countries: the share of the euro in the total deposits and loans respectively. Although it can be positively reviewed that the share of the euro in deposits has increased in most non-euro area EU Member States and EU candidate countries, the increasing percentage of the euro in the total loans can be problematic in terms of creating macroeconomic risks. On the flow side, as we have clearly observed during the global financial crisis, unhedged borrowing by households and corporations in euro may directly lead to extravagant credit growth if an interest rate differential vis-à-vis domestic currency loans is volatile and fluctuating. On the stock side, the banks might be facing a hard time balancing between loans and credits. In the event of an exchange rate shock, debtors will become financially failed its capacity of repayment since a depreciation will change the value of the borrowings. However of a country even in non-euro zone exhibits high exchange rage volatility vis-à-vis the euro, it will continue to consider and is more likely to invoice in euro in terms of trade transactions, foreign exchange rates, individual purchasing power, denomination of deposits and loans.
Crisis in Greece
Since the past two years, many countries on the globe have been facing global credit crunch but there is a new setback as Greece hits financial crisis because of which there is devaluation in euro. Many skeptical arguments have been given in accordance to this crisis that shall be discussed in the paper.
Recently there has been a plunge in shares in Greece and custom officers faced a crisis as budget cuts were decided by the Greek government. This financial crisis spread across the Mediterranean and IMF started to show its influence on euro zone. Greeks because of their incompetence had jeopardized the credibility of monetary union and after this crisis; there has been an utter need of organized European governments especially in case of Spain and Portugal.
It has been stated by Jean-Claude Trichet, president of European Central Bank that Greeks are in a need to cut down on the budget deficits. In the face of this financial crisis, some strategies implemented by the Greek government include tax raise, freezing of wages in the public sector along with pension reforms. This crisis has been traced back to previous governments in Athens when reluctance was observed in Greeks to uptake the budgets. Not only this, Greeks were having short term goals associated with a single currency and a sheer reluctance in realizing long term roles that have been played by Europe in the fluctuating global economy . In order to deal with this financial crisis, technical advice has been requested from IMF by the Greek authorities. However, at the moment it has been argued that the only role that IMF can play is in prevention of the spread of this financial crisis. Across the borders, this issue has been given a serious consideration. It has been realized by the financial analysts in New York that if this crisis remains in Greek than only euro zone will be in problem. While on the other hand, if this crisis reaches other countries as Spain, this can be a call to disaster. Many publications have argued that Greece is one of the countries that are serious defaulters. Greece has faced more than five defaults and financial crises since its birth, around 200 years ago. Thereby Greece has been considered as one of the worst countries in defaulters list as compared to any other Latin American country. For Greeks, the reasons of this crisis does not matter and currently, importance has been given to 10% pay cuts, higher taxes on fuels and longer working hours for receiving pension . Spanish government has announced that there is a need to increase the number of employment years of state based employees in order to receive pension. Since the past two years, countries as Spain, Greece and Portugal have been facing global financial crisis and Greek financial crisis has prolonged this fight for a period of two more years. Moreover, it has been argued that as a result of this, there will be an increase in unemployment and weakening growth in these three countries.
Budget cuts can have an effect on the single currency thereby highlighting many weaknesses in the single currency including lack of an organized and a central budgetary mechanism as this could help in moving sources from richer parts of the pole to deprived parts.
Moreover, as the financial analysts have argued, during the times of financial crisis, countries depend on having a currency of their own thus considering devaluation. In order to avoid political and civil unrest in Greece, it is being thought that national currency is in a need to be established, dropping euro as a currency. This ideology has perplexed investors and it has created a great gap between Greek bonds and Greek funds. Thereby an important question that has to be considered that being a middle rank euro zone country, can Greece fight this financial crisis by redesigning proper structural reforms and monetary policies.
In the light of leaving the single currency, it has been seen that Spain, Greece and Portugal have no strategies based on this ideology yet. Moreover, it has been argued that euro has been better and revolutionary for the Greeks if their previous financial situations are compared. Till the third quarter of 20th century, dictatorships were predominant in Spain, Portugal and Greece and being a member of EU they anticipated higher political power as a result of adoption of single currency. It has been critically argued that dealing with this financial crisis is not in the hands of countries as Spain and Greece. These two countries lack physical and human infrastructure being main components of competency for any country. It has been argued that if these countries start investing in building infrastructure including universities and roads; there are chances that this crisis can be handled.
In addition to this, it has been argued that EU needs to consider decreasing working population on an yearly basis. It has been argued by Jack Goldstone, professor in George Mason University's school of public policy in the US that by the year of 2050, there will be a 24% reduction in European working population and a 47% increase in people aging 60 years or so. It has been argued that there is a huge amount of political capital invested in Euro by the political communities. An important question that needs consideration is if euro will survive this crisis. As a result of this financial crisis, euro has faced a drop in value. In the pre euro days, two euro zone countries, Germany and Netherlands had strongest economies including German mark and Dutch guilder. In the face of this crisis, these two countries have been badly affected thereby refusing any help to be provided to Greece to recover from the crisis. None of the member countries in EU is willing to help Greece. UK that has always been reluctant to join the euro zone has taken a stand to help Greece in order to save euro. Britain has argued that if rescue funds released by EU are equal to Greek budget deficits along with EU decision that member states play their roles in helping Greece to recover from this crisis than there might be a need to pay £7 billion to Greece. This plan has been skeptically argued that if this payment bails out Greece from the current crisis than rest of EU member states might ask for the same help that will leave Britain with a payments sum of £50 billion. In the face of Greek financial crisis, there has been devaluation in value of euro. Some Greek lobbies are also thinking over dropping euro thereby having a chance to build national economies that can help in devaluing euro in order to recover from the crisis
Conclusion
The fundamental goal of introducing the euro nearly ten years ago was to achieve a higher level of economic integration within the European Single Market and thereby to promote both economic growth and stability primarily. The internationalization of the euro can bring a number of long-term benefits to the euro area. These include revenues, the capacity to place securities among foreign investors at a liquidity discount and, ultimately, a stronger ability to finance current account deficits. An international euro can also promote more international business for the euro area’s financial institutions and can contribute to the development of its financial markets. In a world of growing financial globalization, these effects are likely to be amplified. Politically, the euro’s international status can be seen as a sign of the success of Europe’s integration process.
The internationalization of the Euro in the international debt securities markets has from a currency viewpoint a strong position, capturing more than one third of global market share, but geographically is strongest only in the EU area and neighboring countries, such as the United Kingdom, and North America. When the issue of judging the importance of currency in the world economy, particularly in trade, it is prominent that the international role of the euro retains a dedicated regional pattern as well. With close geographical links with the euro zone, the use of euro in the global market becomes most encouraged in countries.
Not to mention the euro enhances its influence as a global invoicing currency and the second largest foreign exchange reserves, there is evidence of an increasing role in currency substitution as in the euro banknotes and asset substitution as in total financial deposits and loans. Markedly the current global financial crisis underscores the risks which involves unhedged borrowing or lending by individual economic actors such as households and corporations as a depreciation of domestic exchange rate will result in an serious macroeconomic instability due to incurring higher borring costs.
Although it seems the US dollar has dominated and will possibly remain its status as the world greatest official role in the reserve and invoicing currency, criticizing the success or failure of the euro as an international role at this point is impetuosity since the euro has only been around in the global financial market for the last decade. The introduction of euro has surely done a striking achievement working to revive the economy within the euro area, and even with third countries. Yet as the observations of the Greek crisis present, there still is a long way to go until the euro actually displaces the dollar as a world unitary currency in the future unless some particular conditions committed by political sector immediately. It does not necessarily that the process of political absolute integration among the European countries is enforced; rather, a unitary political consideration or commitment among the member states of EU should be considered which reinforce the transparent decision-making procedure that eventually lead to a fair but beneficial competition in fiscial and monetary policies.
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