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External aspects of economic and monetary union.


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EURO PAPERS are intended to provide information of a practical and/or technical nature on the implications of the introduction of the euro and to seek comments and suggestions. This first issue presents an analysis of the external aspects of the euro. It is structured as follows: - Part A provides some economic indicators in order to evaluate the weight of the euro area in the world economy, particularly relative to that of the United States and Japan; - Part B and C discuss the implications of the changed policy framework of the euro area: part B analyses a number of transitional issues associated with the introduction of the single currency, in particular the likely currency movements; part C examines long-term aspects and attempts to draw conclusions on the likely behaviour of the euro given the different environment in which monetary and fiscal policy will be operating; - Part D analyses the consequences of EMU for international economic coordination.

Without catalogue number

Executive Summary

Economic and Monetary Union is a further step in the ongoing process of European economic integration. In this respect, it is also part of the wider integration in the global economy. EMU will enable the European Union to meet the challenges of globalisation.

While EMU implies an economic policy regime change primarily for the participating countries, it will also have important external implications. EMU will create an area whose economic potential will be comparable to that of the United States. Structural changes will occur primarily in financial markets. The present segmentation will be overcome in many respects and the European financial market will become truly integrated. The implied greater competition between banks and financial systems in general will lead to efficiency gains in terms of resource allocation and ultimately stimulate investment and job creation.

Given the size of the euro area, it is to be expected that the euro will play an important role as an international currency. As a trade invoicing currency, the euro will extend its role beyond direct trade relations. Given the stability oriented policy of the ECB and Member State fiscal policies aimed at sound public finances, the euro will play an important role in financial portfolio’s world-wide, and as a major reserve currency.

The development of the euro into a major international currency will be gradual, but relatively important in those countries, which have close links with the EMU participating countries. Some effects will become observable even before EMU starts. Therefore, a careful preparation of the changeover is of paramount importance in order to reduce transitional uncertainties. The durability of convergence in the euro area will increase the confidence in the stability oriented policy of the ECB and should therefore reduce any risk premium initially attached to the euro. This will facilitate the ECB’s task in pursuing a stability oriented policy. Speculation on possible effects arising from excess dollar reserves is not founded. Moreover, shifts in private portfolios are very difficult to ascertain as there are factors which work in opposite directions, thus largely balancing out net effects.

The long-term trend of the euro depends on both domestic and foreign economic developments and policies. However, the design of economic policy making in EMU will strengthen the European economy since it will encourage a balanced policy mix with low interest rates. The euro will be a strong and stable currency in the long term.While the exchange rate policy of the euro will be subordinated to the price stability objective, the ECB would respond to external developments taking the interests of the EMU as a whole into account.

EMU will have implications for the EU’s relationship with international institutions with responsibility for improving the stability of the international monetary system. Although the most likely scenario is that the current managed floating system will be maintained, EMU should increase the symmetry in the international monetary system, thereby enhancing the benefits and allowing for a more efficient distribution of the benefits derived from international economic coordination. It will have also implications for the operation of international institutions, e.g. for the economic surveillance carried out by the IMF. The euro will thus be the opportunity to strengthen the effectiveness of economic policy co-ordination, contributing to greater exchange rate stability

(Euro Papers 1. July 1997. Brussels. 19pp. Tab. Ann. Free.)

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