The European Economic Community And The Euro Dollar

The European Economic Community And The Euro Dollar EEC and the Euro Dollar The European Economic Community (EEC), also known as the common market, was established in 1957 through the treaty of Rome signed between Belgium, France, Italy, Luxembourg, the Netherlands, and Germany in order to achieve economic cooperation. “It has since worked for the free movement of labor and capital, the abolition of trusts and cartels, and the development of joint and reciprocal policies on labor, social welfare, agriculture, transport, and foreign trade.” Over the years, monetary union has been suggested by the members of the EEC and was finally attained on January 1,1999 when eleven European countries, which are now collectively referred to as Euroland, introduced a single currency, the euro. Since then, the euro has invaded nearly every sector of the world economy. The monetary revolution embodied in the euro involves far more then the elimination of 11 currencies and the distributions of colorful new banknotes and coins across Europe. “It entails the solidification of the European Union’s common market for goods and services, major structural changes in countries plagued by fiscal imprudence, and the reorganization of monetary policy in some of the world’s most advanced industrialized economies” The risks of implementing the euro consist of supply shocks and political discord. Although the ongoing risks of maintaining Economic monetary union may hinder the stability of the euro in the long run, the integration of the euro to the EEC as of January 1999, has so far proven to have a positive affect on the European economy and has allowed it to achieve its primary political and economic goals through its four core benefits: the reduction of transaction costs, the elimination of exchange rate risks, increased price transparency, and the creation of deep financial markets. The Euro is the newly created currency of the European Economic Community, a currency that became legal tender on January 1, 1999.

By 2002, euro notes and coins will replace the Austrian schilling, Belgian franc, Finnish markka, French franc, German mark, Irish punt, Italian lira, Luxembourg franc, Dutch guilder, Portuguese escudo, and Spanish peseta. These 11 nations will share a common currency, a single monetary policy, and a single foreign exchange rate policy. Currencies not only serve as a standardized value of measurement, so that we have a consistent way of expressing value, but they also function as an efficient means of payment. Also they serve as a store of value, allowing us to transport wealth easily over a distance and to store it for indefinite periods of time. There are two main reasons for this monetary union within the EEC (European Economic Community), one being a political reason and the other an economic reason. The political arguments are that a single currency will further unite the European alliance, which was formed after WWII, by forcing Europe to act as a whole rather than as single states. This could perhaps eliminate nationalism and bring unity to this continent, which has been plagued by war twice in the last century.

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The Economic reasons for the euro project can be found in the relatively poor performance of the European economies over the last twenty years or more. Europe has, for a long time, suffered form relatively weak economic growth. “Economic growth that trailed behind that in North America and Asia: productivity gains were weak; unemployment remained persistently high; and many European countries suffered form persistently high wage and price inflation. This was generally thought to be caused by relatively rigid and inflexible labor markets; a high level of government involvement in the economy; a less enterprising culture compared, in particular, to that in North America; and a poorer track record of innovation and research and development.” The euro has given Europe one of the largest and most powerful trading blocs in the world. Although the euro doesn’t alter the fact that Euroland is composed of diverse and highly independent countries, it strengthens the economic and political ties of the region and its part in the world economy. Because of the success of the euro will ultimately be determined by the collaboration of EEC governments through the formulation of exchange rate policy to the harmonization of legal systems and security policy, the concept of western Europe as a single economic and political bloc is now more applicable than ever.

The euro creates the second-largest single currency area in the world, one that follows the United States in total output. When and if Great Britain, Sweden, Denmark, and Greece join the euro area, Europe will easily surpass the United States in total economic output. Already, Europe is home to more people who are united by a single currency than is the United States or Japan. Whereas the costs of a common currency have much to do with the macroeconomic management of the economy, the benefits are mostly situated at the microeconomic level. Eliminating national currencies and moving to a common currency can be expected to lead to gains in economic efficiency. The euro’s four primary and direct benefits are: the reduction of transaction costs, the elimination of exchange rate risk, increased price transparency, and the creation of deep financial markets.

The first benefit that has come about as a result of the integration of the euro into the EEC has been the elimination of exchange rate risk. In the international business environment, decisions made today are often adversely affected by future shifts in exchange rates. The more unpredictable exchange rates are, the more risky are foreign investments and the less likely companies are to pursue growth in foreign markets. By replacing European national currencies, the euro eliminates exchange rate risk between participating currencies. This will be a bonus to international investment in Euroland. Exchange rate risk is potentially troublesome to any consumer, producer, or investor who makes an economic decision today that results in a payoff, or the delivery of the good or service at a later date.

Firms have often used hedging techniques in order to protect themselves from these fluctuating exchange rates. By hedging, firms buy the right to exchange foreign currencies in the future for the price that prevails today. But hedging has a price, just as any insurance policy has a price. It is not free and is not available to every business. A second benefit of the euro has been the elimination of transaction costs. Tourists planning European excursions before the euro found themselves with the hassle of many currencies, “each recognized by a small geographic segment of the European Union, and exchangeable only through banks, traveler service offices, and credit card companies for a fee.” The euro eliminates these transaction costs.

“It is difficult to estimate exactly how large the euro’s transaction cost savings will ultimately be, but for Europe, a continent in which international trade is vitally important, the savings will be substantial. One European Commission study estimates that, before the euro, European businesses converted $7.7 trillion per year from one currency to another, paying $12.8 billion in conversion charges, or 0.4 percent of European Union GDP.” Increased price transparency is a third benefit of the euro. A single currency makes price difference between goods, services, and wages in different countries more evident. Before the euro, Euroland consumers found it difficult to compare the prices of goods across national boundaries. As a result price discrimination was implemented.

No longer will consumers have to think in terms of which exchange rate to apply and the transaction costs involved in switching between currencies. The price of the good will be set in euros in all of the countries in the euro area. “This transparency will be coupled with the greater freedom of movement of goods and services within the single market an the overall effect should be to encourage competition and drive prices lower.” This will be a disadvantage to retailers who will find it increasingly difficult to differentiate prices between markets. Due to the absence of exchange rate risks, entrepreneurs feel more comfortable establishing businesses that take advantage of small differences in cross-border prices. Also, some claim that these price transparencies created by the euro will eliminate continental price differences for identical goods and services. However this is incorrect since prices are determined by the interaction of supply, demand, and regulation in a wide variety of competitive environments.

Therefore, the introduction of a common currency in Euroland does not eliminate price differences. Finally, the creation of deep financial markets is the fourth and last direct benefit of the introduction of the euro. “Before the euro, efforts to match the immediate financial needs of consumers with the investment requirements of savers were plagued by the psychological and economic costs of 11 national currencies.” Every type of financial device such as government bonds, commercial bank loans, and stock was listed in a national denomination. This fractured financial markets and discouraged foreign investment and would have done so even without transaction costs and exchange rate risks. The euro revolutionizes this situation. Since January 1, 1999, Euroland’s major exchanges have listed their financial instruments in euros.

To investors and borrowers, such developments have made the European financial markets broader, more accessible, and more liquid. Because this promotes unrestricted international trade in the world’s single most important market, the market for money itself, it is considered one of the euro’s core economic benefits. Together with the four primary and direct benefits attained from the euro, there are also other economic benefits that are more indirect. They involve: macroeconomic stability, lower interest rates, fundamental structural reform, the creation of a new global reserve currency, and increased economic growth. The euro has brought macroeconomic stability to unstable European nations.

Many of the EEC’s fifteen member countries have battled inflation. “This confuses buyers and sellers, increases borrowing costs, raises the effective tax rate, sends negative signals to investors, and creates gross market inefficiencies.” However, the euro has introduced a new regime of low inflation and macroeconomic stability from many Euroland countries. According to some experts, this is virtu …


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