Can the euro challenge the dollar as the world's international currency?

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Dima Alexandrov


The Euro and the Dollar

Can the euro challenge the dollar as the world’s international currency?

 I. Introduction

The creation of a single European currency is the most important development in the evolution of the international monetary system since the widespread adoption of flexible exchange rates in the early 1970s. The euro is the first real competitor to the dollar since it surpassed sterling as the world's dominant money during the interwar period.

The political impact of the euro is at least as large as these economic effects. A bipolar currency regime dominated by Europe and the United States, with Japan as a junior partner, are going to replace the dollar-centered system that has prevailed for most of this century. A quantum jump in Trans-Atlantic cooperation requires to handle both the transition to the new regime and its longer term prospects.

Introduction of the euro has been carefully planned for years, on January 1 of 1999, the euro becomes a reality.

Technically, the euro was used since it was launched; it is purely an electronic currency. Therefore, all cash transactions are used by its membership cash. But bank accounts and credit cards may use the euro. Actual minted currency will not be available until January of 2002.

Limitation of the essay.

In order to justify which currency is strong I have done a lot of researches from books, journals, internet sources. From those sources I try to analyse as my personal views combined with some analysts from books and journals. All the figures and sources I use in this essay are public information. I list them at the end of the essay.

However, my capacity is limited, therefore this essay is somehow limited too. Some paragraphs, articles were written as originals from the books or journals etc.

I have tried my best to finish this assignment, however, it still has some weaknesses.


Chapter One

Introduction of the Euro

History of the euro

The two people who did most to create the euro were former Chancellor Helmut Kohl of Germany and the late President Francois Mitterrand of France.

Kohl and Mitterrand believed passionately that a single currency would unite the countries of Europe so closely that they could never go to war again as they did in 1914-1918 and 1939-1945.

They championed the single currency as the next great step forward for Europe once it had completed the 1992 'single market' project, which eliminated most barriers to free movement of people, goods and money across the European Union.

Despite fierce British objections and considerable nervousness in Germany and France about giving up their national currencies, Kohl and Mitterrand made sure the project of establishing a single currency was one of the centrepieces of the 1992 Treaty of Maastricht, the latest in the series of treaties which act as the constitution of the European Union.

The single currency had a long history before Kohl and Mitterrand, however. Today's euro is the end result of thirty years of work by politicians and bureaucrats across Europe. Here's a quick chronology:

1969 European summit in The Hague makes Economic and Monetary Union (EMU) one of the official objectives of what is then called the European Economic Community.

1970 Prime Minister of Luxembourg, Pierre Werner, presents plan to achieve EMU within 10 years. Plan is largely abandoned in the economic disruption which followed the quadrupling of oil prices by OPEC in 1973-74.

1979 Drive towards a single currency resumes with of European Monetary System (EMS), under which the governments of the member states agree to keep the value of their currencies within fixed 'bands' in an Exchange Rate Mechanism (ERM).

1990 Stage 1 of European Monetary Union (EMU) begins with removal of exchange controls across Europe. People and businesses can now move as much capital as they wish from one country to another. Britain joins ERM.

1992 In February, EU governments sign Maastricht Treaty stating their determination to establish a single currency.

In September, Britain is driven out of the ERM by massive speculation by currency traders. They sell so much sterling that European central banks cannot stop it plummeting below its fixed band in the ERM. The experience of 'Black Wednesday' makes even British politicians and bankers who support the single currency very cautious about joining it unless economic conditions are very favourable.

1994 Stage 2 of European Monetary Union begins with the establishment of the European Monetary Institute, the embryo European Central Bank.

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1995 Governments agree to call the single currency the euro.

1998 European Central Bank established.

1999 Stage 3 of European Monetary Union begins on 1 January. Financial institutions start trading euros on global markets; individuals and businesses can open bank accounts and carry out non-cash transactions in euros. Coins and notes are due to follow by January 200.

Participating countries of the EMU

The eurozone or ‘Euroland’ as some call it, is huge. Its 12 members are: Austria, Belgium, Finland, France, Germany, Ireland, Luxembourg, Netherlands, Spain, Portugal and a recent joined member – Greece.

Only three countries which ...

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