The Euro

.. t 30 percent of gross domestic product. There is still less regulation here and growth is much stronger. Small wonder, then, that European investors are fleeing the Euro in favor of dollars. The euro enjoyed a very short honeymoon after its launch in January, as its value fell steadily against the dollar and the pound.

Not only has this been an embarrassment for Euroland politicians and central bankers; it also has caused some to doubt on the whole single-currency project and question whether UK entry is likely, or even desirable. There are, however, several good reasons why the current relative weakness of the euro is more of a public relations than a real economic problem for Euroland or the single currency project. 1. History shows that currencies often move around by large amounts in the short term for reasons that few people anticipate or can fully explain. The recent movement of the euro is nothing exceptional by historical standards.

The dollar, for example, has fluctuated between 80 and 150 yen over the past five years, and even fell by about 10 percent in one day last autumn. 2. The adverse impact of the Asian and Russian crises has created a tremendous drag on the German and Italian economies since last summer. The recent weakness of the euro is just what the doctor ordered for these and other Euroland exporters if I can say that, as it makes their products and services more competitive on international markets. 3.

A weak currency sometimes creates inflationary pressures by increasing the price of imports. However, this is hardly likely to be a problem in Euroland, as it is a relatively closed economy and output is currently well below potential. 4. In the short run, currency values are driven more by capital flows than by trade flows. This helps to explain why the dollar has remained so strong despite the growing U.S.

trade deficit, which will probably exceed $300 billion this year. Sooner or later, however, foreign investors will start to worry about the U.S.’s ability to repay its accumulated external debtsXand the dollar will come tumbling down. This is exactly what happened after 1985: the markets finally factored in the U.S. trade deficit that had built up in the early 1980s, and the dollar fell sharply against the yen and the Deutschemark. 5. Since expectations of strong future growth are holding up U.S.

asset prices and capital inflows, any slowdown in growth will also tend to bring down the dollar. 6. Once the dollar tumbles, I believe other currenys like the pound sterling will fall too. 7. There is plenty of time for this exchange rate adjustment to happen before 2001 or 2002, when the UK begins to consider seriously the case for EMU membership this will boost the euro. 8.

The euro, however, is already a reality for companies that trade in Euroland markets, rely on Euroland suppliers or compete with Euroland companies in the UK, America or Asia. The more these companies struggle against a competitive euro, the greater the benefits of UK membership will seem. The European currency was launched on January 1, 1999.There have been intensive pros and cons discussions on this issue in the recent years. Famous economists, monetary experts have pleaded for and against the launch of the euro. The pro experts seem to have won, at least those, who expected and supported the launch of the euro in January, 1999. Some people never believed, that the euro would ever become reality.

In my opinion there is still a bunch of open questions, which will be decided in the next years? 1. Will the euro really bring Europe together, stimulating economic growth and bringing more jobs in Europe, or, at contrary, will it divide Europe, destroying economic structures in less competitive regions and branches, causing more unemployment on our continent? 2. Will the euro really become a stable currency? The ECB has a strong independent status. 3. What about social policy in an euro Europe? The Amsterdam Treaty did not mention the word social, and the European Stability presses governments to reduce their public expenses, even to get a budget surplus in some years. Is this realistic in all EMU member countries? Who will be losers? Our country has a specific task in having to finance the reunification, so it cant be compared with the US, which have a budget surplus now.

4. What does the euro mean for me personally? So far I havent made much EUR payments at. How will we perceive possible strong changes of the EUR exchange rate, especially with respect to the USD? Is the three years transition period sufficient, too long or to short, or doesnt it matter at all to me? Questions, that everybody can answer in a different way. The European Union’s single currency has suffered another blow after Danish voters said ‘Nej’ to joining the euro. Anti-euro campaigners in Britain say the result sounds a death knell for the UK’s propspects of replacing the pound, but supporters are pledging to forge ahead.

What is the euro? The euro took effect in 11 of 15 EU countries in January 1999 for corporate and investment transactions but is not in public circulation yet. The new currency is, however, posted on menus and in supermarkets in countries that have signed on. Coins and bills go into circulation in January 2002. Denmark, Britain and Sweden opted out, while Greece, which was barred from membership because of high inflation and a budget deficit, will join on January 1st. Denmark already ties its fiscal and monetary decisions to those made by the 11-member euro zone. The euro, however, has not had an auspicious start, having lost a quarter of its value against the dollar since its launch.The slide prompted enough concern last week for major central banks – Britain’s among them – to intervene jointly on currency markets for the first time in five years. Denmark and the EU Denmark’s referendum on whether to join the euro is the fifth since the October 2, 1972 plebiscite that paved the way for membership of the then-European Community, which Danes joined on January 1, 1973.

In 1986, 56.2 per cent of Danes voted yes to the EU’s Single Act while 43.8 per cent rejected it. In 1992, Denmark stunned fellow EU nations by rejecting the Maastricht Treaty – which formally launched the single currency – by the tiniest margin. A year later, voters approved a revised treaty with clauses allowing it to initially stay out of the currency and the defense cooperation. In 1998, a majority of 55.1 per cent of Danes approved the Amsterdam Treaty, which expanded the power of the EU, while 44.9 per cent rejected it. Other EU countries include Germany, France, Italy, Finland, Netherlands, Belgium, Luxembourg, Ireland, Portugal, Spain and Austria.

Statement by the Danish Government Following is the text of a joint statement by the Danish Government and central bank, Danmarks Nationalbank, on the decision by Danish voters to reject euro membership:Given the result of the referendum Denmark shall not abrogate its exemption from Danish participation in the euro.Denmark’s EU-membership remains unchanged. Denmark will continue the present fixed exchange rate policy vis-a-vis the euro within the framework of the narrow band of EU’s exchange rate mechanism, ERM II.The Danish economy is fundamentally sound. Danmarks Nationalbank and the Government will follow developments in financial markets closely and stand ready if need be to take measures in order to maintain and continue the fixed exchange rate policy.The Fiscal Bill for 2001 is based on Danish participation in the euro. The negotiations on the budget will start next week, and in this context the Government is ready to tighten fiscal policy if this should prove necessary to maintain Denmark’s fixed exchange rate policy. Will Britain ever accept the euro? Europe is likely to be a key issue in a general election, which Tony Blair is widely expected to call early next year. The close, but clear result in Denmark is seen as a Danish snub to much more than just economic and monetary union.

The euro poll became a test not just of the single currency but of the European Union’s much-heralded drive for increasing political integration and almost certainly means a ‘No’ vote in Britain. ‘No’ campaigners say the rejection of the euro by Denmark proves the European single currency will never be accepted by British voters. Mr Blair has promised, if re-elected, to assess the benefits of joining the euro in relation to five key economic tests early in the next parliament. Denmark’s rejection of the European single currency won’t affect Britain’s own decision on joining the euro, the Government has said. The people of Denmark have made their decision.

The British people have the same right to make their decision for Britain, said Foreign Secretary Robin Cook. Labour has said it supports joining the euro in principle, but has yet to fix a date. A decision to join would then have to be approved by Parliament and submitted to the people in a referendum. Anti-euro campaigners said the result of the Danish referendum made it more likely Britain would keep the pound. Tory leader William Hague has underlined his commitment to keeping the pound were he to become prime minister.

At the next election, only the Conservative Party will be committed to keeping the pound, he said. Britain’s business community remains split on the merits of joining the single currency. The latest opinion polls show that over two of every three British voters oppose joining the euro. Q Conclusions In summary, the first year of operation of the ECB has been successful and the monetary policy strategy of the ECB has proved to be a valuable tool both in supporting monetary policy decisions and in explaining these decisions to the general public in a transparent manner. As to the time ahead, the ECB will do its utmost to maintain price stability in the euro area.

In our view, this is the best contribution the ECB can make to sustained economic growth in the euro area. Maintaining price stability in the euro area will contribute to the credibility of the single monetary policy and to the stability of the single currency. It will pave the way for the long future of the euro. Business Reports.

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