The Euro And Its Impact On The U.S. Economy

As of 2012, only seventeen of members of the European Union have decided to use Euros as their currency. In order for the members that adopted the Euro as their currency to successfully help their economic problems, the Eurozone members had to follow strict instructions put into place the European Union. The strict policies included strict control over inflation, government debt, and long-term interest rates (Mckee 525). The union put these strict policies into place to give the union the tools that it needed to take in order to help fix the economic crisis in each country participating in the Eurozone. Without the full cooperation of each country, it could cause the plans to fix the economic crisis within each country to fail because of the different interests by each individual country.

The EU sought to simplify trade within European neighbors and to replace national currencies with a single shared currency that could compete with the dollar on the global stage. The members of the newly-formed European Union agreed to a fixed currency conversion rate when the Euro was adopted (Scheller). Initially, the EU only had 11 members, but membership has since grown to 25 member nations. These 25 member countries operate within what is called the Eurozone, over which the European Central Bank sets economic policy

     In 1995 Austria joined the European Union (EU), and in 1999 they joined the European Monetary Union. The use of a common currency the “Euro” has facilitated trade and promoted economic stability for U.S. companies to manage pricing, balance accounts, and move products into Austria and throughout the EU member nations (“globaledge”, 2003). An unfavorable exchange rate for U.S. exporters turned positive in 2003 making the U.S. able to compete on more favorable terms in the near future.

In this essay I am going to discuss and evaluate whether or not I think that the UK government should join the euro and the advantages and disadvantages of being in the Eurozone. Additionally, I will be discussing and evaluating the exchange rate theory, the UK’s entry and withdrawal of Exchange Rate Mechanism (ERM 1) and which elements are included in the European Monetary System (EMS).

With America pumping in massive amounts of money in the economy ,USA’s national debt has increased to a whopping $1.42 trillion in 2009, a $960 billion increase from the 2008 deficit, representing 12.3% of gross domestic product, the largest share since World World .As a result dollar has dropped against the emerging-market counterparts. The high level of debt and continuing large trade deficits have raised concerns regarding inflation and the value of the dollar relative to other currencies, as well as its place as the primary reserve currency.

Deutsche Bank (Karczmar, 2004) suggests that the euro could eventually challenge the dollar as a reserve currency, but the euro is still far behind the U.S. dollar as a reserve currency, representing just 24.2 percent of the world banking reserves in the 2013 third quarter (International Monetary Fund, 2013). Numerous economists endorse the United States’ ability to safely continue its external deficits. Cooper (2001) poses the argument in its simplest form:

Nevertheless, the region continues to demonstrate that it can and will resolve each successive stage of the crisis by cooperating as well as sharing decision-making powers. In addition, the members of the union have been on the forefront in the generation of continent-wide institutions as well as building of substantial financial firewall to prevent debt problems from spreading. The region is creating a banking union and efficiency partial fiscal union. From this perspective, the common currency and the entire project of European integration will survive as well

Sixteen of the twenty seven member states of the European Union have adopted the euro (€) (Anon, B. 2009). Consequently the euro is used daily by some 327 million Europeans (Anon, E. 2009). It has developed a limited role in foreign policy, having representation at the WTO, G8 summits, and at the UN (Anon, E. 2009).

The European Union launched the economic and monetary union (EMU) of Europe on January 1st, 1999. January 1st of 2002 marked the establishment of a single currency through the introduction of euro bills and coins to 12 EU states. Formally called the “eurozone”, the movement to a single currency has developed as 18 EU member states currently use the euro. Desiring further political integration, the EMU was designed to maintain price stability through a central bank known as the European Central Bank (ECB). Although economic certainty was the goal, a financial crisis that erupted within the eurozone lead to questions about the credibility of the EMU. The debate over political integration was furthered by the introduction of ideas for increased fiscal federalism, similar to the current policies within the United States currency union. For a monetary union to succeed, a fiscal union is necessary to solve the vulnerabilities of the EMU and supervise national policy to prevent macroeconomic imbalances throughout Europe. However, the dispute over political centralization impedes the establishment of such a fiscal system within the upcoming decade.

It is unlikely for the Euro to gain stability based on the current market movement and expected market movement in the next three months. With fed intervention, it is expected to see the Euro/USD exchange rate rise to 1.05, (Eurorateforecast.com, 2015). The Euro is expected to continue declining for the next three months and even in the foreseeable future. The declining rate has enabled currencies such as USD and Sterling Pounds to make gains against the Euro in a very substantial manner. The declining rate of the Euro/USD exchange rate is expected to follow the trend outlined below in the next three months. The Euro/USD exchange rate is expected to fall to 1.07 in a period of one month and then to 1.05 in three months. The latter will see the USD gain strength against the Euro, (Bank, 2015). The strength of Euro mainly depends on the desire of private investors to hold assets in Euros. The European Central Bank has failed to check the anti-inflationary measures that will assist in seeing the Euro strengthen against the US Dollar. The Central bank has also failed to maintain the price stability that has facilitated the continued deterioration of the Euro.

The Euro system’s main function is to define and implement the euro area’s monetary policy. Its basic tasks include achieving price stability; holding foreign exchange operations; managing the official foreign reserves of participating EU countries; driving on the operation of payment systems; and conducting the policies of governmental responsible for the prudential supervision of credit institutions and the stability of the

Essay question: History shows us that attempts to fix exchange rates or create monetary unions between different countries usually end in failure. Therefore, we should not be surprised by the current problems in the Euro Zone. Discuss

The viability of Euro as a common currency here will explicate the financial crisis in the Eurozone countries to prove that the EU has failed. Before World War II, doing trade across borders is difficult. Countries need to pay a fee to exchange currencies, before a tariff fee is then executed when trade between companies of two different countries are involved. This eventually had stifled the economic growth. After WWII has ended, the situation among the European countries is so dire that they have to call for a unification process in order to hasten the

It is important to understand how the European Monetary System works, because the world is becoming highly globalized. Not only are businesses using trade, but consumers are dabbling into the consideration of buying products straight from other countries. Knowing how Europe’s currency, political and economic system works can help other countries better participate in trade. But because of the size of the European Union, it has become a difficult task to bring all those European nations to operate in unison. Europe is made up of more than 30 countries that have even more varieties of different cultures. Bringing these different cultures and systems together has been a long process over time that is continuing to develop.

El problema no es nuevo, las primeras señales de alarma sonaron antes del lanzamiento del euro en 1999. Incluso, muchos economistas se oponían a una creación prematura del euro porque no tenían un nivel de integración política y económica que pudiera sostener la moneda. Lo cual no ha cambiado.