The new international currency of the European Economic union, euro became the national currency on January 1 2002. In this union where only euro is valid as currency includes Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, Netherlands, Portugal and Spain and their national currencies will cease to exist. Before the euro formation, there existed the gold standard and the Bretton Woods system. Both were aimed at the internal and external stability. These policies collapsed when the two goals diverged.
Since the euro eliminates the exchange rate problem and focuses more on the internal stability by unifying currency, the policy target dichotomy can be resolved. Even though nothing like euro has been established before, it was formed to benefit the European economy by controlling the budget deficit, by having a more stable government, and by creating an even closer union among the people of Europe thus there are many benefits that will allow euro to exist in the long run. The formation of euro has increased the importance of internal stability such as price stability and employment.
The Europe’s move to euro must stand on a foundation of stable government policies. The stability will cause lower prices, lower interest and create more jobs and investment. The internal stability should be build from the inside and not pressured from the outside by fixed exchange rates, ”Monetary stability had to be built at home” quoted by Heinz-Peter SpaHn. By uniting Europe the “home” area has expanded. The articles in the Treaty on European Union clarifies that the budget deficit cannot exceed 3% of countries gross domestic product by establishing very clear surveillance procedures. The deficit will be considered an exception if there is a very sharp economic downturn that causes an annual fall in real GDP of at least 2%.
There are negative aspects of Euro that critics talk about such as trade barriers and different languages and the passports for the borders. The trade has been increasing throughout Europe. When we look at the given data, the volume of cross-border transactions grew. The figures show that over the first three years of the euro trade volumes increased 16 percent for Italy, 17 percent for France, 23 percent for the UK and 29 for Germany. One of the regulations says that the advisability of improving consumer services by strengthening the conditions of competition in the provision of cross-border payment services. This means that the competition in Europe is beginning to spread and increase which is what is needed for economy to grow and develop. But the survey confirms that the euro zone still charges consumers too much for cross-border transactions involving small amounts of money.
The overall intra-industry supply chains are less price sensitive and the growing use of hedging options by businesses is reducing the risk cost of international trade. This increases the price competitiveness and reduces the cost of international transactions. The language problem still exists. It does stand in a way of labor movement and greater integration. But the change from national currencies to euro is not a short run move. In the long run this problem can be eliminated. Moving between the borders already became much easier than before. Now the citizens can travel through borders without any visas and without worrying about exchange rates. Some critics say that the unemployment in the euro countries is much higher than in Britain or US or Japan.
In the progress of building euro, millions of jobs were lost because their government cut public spending and raised interest rates. But this was a necessary step for Europe since one of the regulations is that the budget deficit should not stay below 3% of the country’s GDP. Even though in 2002 Germany has a budget deficit of above 3% of its GDP it is expected to be below 3% next year. France’s deficit is expected to rise to 2.9% next year so it is recommended that France be issued a formal early warning. Critics say that because their countries have control over their own economy means that they have policies that are right for them and the economy is more stable and can grow faster. But once the European counties become more united, the economy will work as one also except that the home area will be greater. There will be even more competition and more innovations, which will allow the union to grow stronger and faster and reduce unemployment.
While some countries approve the euro formation, some are against it. For example the Czech Republic, Hungary and Poland are working on being accepted to the European Union and then they will also want to switch to the euro. Since some of the European countries are not allowed to join the union as of right now, there are still many fluctuations that euro may experience before it actually stabilizes. Hotels and some other travel services in these and other Eastern European countries are already quoting prices in euro for international booking. On the other hand for example Britain is completely against joining the union. Britain says that it needs the economic independence to pursue its public spending priorities. Britain needs to invest more in public services to compensate for under-investment in the past and catch up with other EU countries. But the membership of the euro and the restrictions imposed by the Stability Pact would hopelessly compromise that aim. Britain also says that their taxations are relatively low and the regulations are light, and by joining the euro they would end up paying more taxes and loose their competitive advantages. By keeping the pound they believe they can keep control over their economy, maintain stability and protect business climate.
Euro is not supposed to work for every country. Also those who do switch to euro are taking a big step into a completely new direction. So it is normal for some countries to be willing to try and for some to want to live the old way and not be influenced by others. Since the formation of euro US has been worried about the future of the dollar. The dollar has always been the major currency and now the dollar faces the first challenge. The gold standard and the Bretton Woods were both based on the dollar so that every country was affected when US changed some regulations. Now that the euro formed, Europe has its own currency. There were expectations of appreciation of the dollar but so far both currencies are pretty steady. Another small point in favor of euro is its appearance. One of the definitions of money is that it should be ease-of-use. When using dollars any foreigner who starts using the bill can easily mistake a 1-dollar bill for a 100-dollar bill. The bank notes of 500, 200, 100, 50, 20, 10, and 5 euro are of different sizes and colors and posses identical designs in all 12 countries. This makes it easier for a foreigner to recognize the bank note.
The formation of euro can have two outcomes. It is either the great experiment like the critics says or it will succeed in the future and stabilize the economy by focusing on the internal balance. By increasing trade and reducing trade restrictions Europe will be more integrated. The increase in competition will benefit the growth of the economy. For economy to expand there have to be new innovations. To have new innovations, there have to be experiments in the economy. The introduction of euro is completely new in our economy and it is a great experiment that will succeed and promote the overall economic growth. This is not a short run move. Euro needs time to develop so that the beneficial results should be seen in the long run.