Managing the European economy after the introduction of the Euro
Managing the European economy after the introduction of the Euro

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Managing the European economy after the introduction of the Euro

1.5 The Euro and the wider world

1.5.1 A ‘two currency’ world?

The introduction of the Euro threatens to have a significant impact on the international monetary economy as well as on the economies of the EU countries themselves. As yet this impact is not altogether clear since the Euro has only been operating for a few years. But certain trends are emerging and the possibilities are opening up. It is the main features of these trends that we concentrate upon in this section.

A preliminary point here is that the Euro exchange rate is not a policy variable or a policy target in the EU context (European Commission, 2005a, p.79). The exchange rate is set by ‘market forces’. The ECB has not intervened in the currency markets to try to influence the value of the exchange rate; all it does is ‘monitor’ exchange rate developments as part of its task of assessing prospects for the Euro-area and setting interest rates.

Figure 2
Figure 2: Euro currency: coins and notes

The international bond market is huge and growing; towards the end of 2000 outstanding accumulated bond issues were well over US$ 30,000 billion, with government bonds comprising three-fifths of this total. Table 4 sets out the trends in the total global issue of bonds (both government and corporate). The three main international currencies for bond denomination, namely the US dollar, the EU Euro and the Japanese yen, are shown separately and all the others aggregated together.

The general trend shown in Table 4 is that it is the two main currencies of the international system (the US dollar and the EU Euro) that are consolidating their hold over the international bond market. The Euro was launched in 1999, and there was a big jump in Euro equivalent denominated bonds issued in that year. In terms of proportions, the US dollar and the Euro-zone currencies/EU Euro accounted for 54.3 per cent of the total in 1994 compared to 73.6 per cent in 2002. This growth was at the expense of the yen and other currency denominations, including the UK pound. What this demonstrates is the consolidation of international financial activity in the US dollar and the EU Euro, confirming the idea of an increasingly two-currency world. This emerging bi-polar currency world is reinforced by the data contained in Table 5 which shows the currencies in which official holdings of foreign exchange are kept in the international system (note that the UK pound still remains important here).

Table 4 Global net issuance of bonds (debt securities) US$ bn, 1994–2002

1994 % 1995 % 1996 % 1997 % 1998 % 1999 % 2000 % 2001 % 2002 %
US dollar 664.3 33.1 796.9 37.2 1125.4 44.9 1255.5 57.5 1726.4 62.0 1511.9 45.1 1053.5 42.0 1302.1 45.1 1443.6 49.3
Euro 876.4 26.1 626.3 25.0 562.9 19.5 714.0 24.3
Euro-area currencies 425.3 21.2 366.3 17.1 528.7 21.1 326.9 15.0 435.3 15.6
Yen 336.7 16.8 434.6 20.3 458.7 18.3 237.9 10.9 185.8 6.7 496.1 14.8 450.6 18.0 570.6 19.8 280.6 9.6
Other currencies 578.3 28.8 544.1 25.4 392.6 15.7 362.4 16.6 438.9 15.6 470.7 14.0 375.9 15.0 450.6 15.6 494.3 16.8
TOTAL 2004.6 100 2141.9 100 2505.4 100 2182.7 100 2786.4 100 3355.1 100 2506.3 100 2886.2 100 2932.5 100
(calculated from Pagano and von Thadden, 2004, Table 2, p. 533)

Table 5 Official holdings of foreign exchange by currencies (end of year percentage)

Euro   US dollar Japanese yen Pound sterling Swiss franc Deutsche mark Unspecified currencies
1994 56.5 7.9 3.3 0.9 14.2 6.6
1995 56.9 6.8 3.2 0.8 13.7 9.2
1996 60.2 6.0 3.4 0.8 13.0 8.6
1997 62.2 5.2 3.6 0.7 12.8 8.7
1998 65.7 5.4 3.9 0.7 12.2 9.3
1999 12.7 67.9 5.5 4.0 0.6 9.3
2000 15.9 67.5 5.2 3.8 0.7 6.9
2001 16.4 67.5 4.8 4.0 0.6 6.6
2002 18.7 64.5 4.5 4.4 0.7 7.3
(adapted from European Commission, 2005a, Table V5, p. 180)
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