Euro Currency


By

Shipra Jain
MBA(Finance), CA(Inter)
Faculty Finance
ICFAI National College
Bhopal
 


At least the curtains are down for the monopoly of U.S. Dollar in the world currency market. The biggest currency swap, affecting the day to day lives of three hundred million Europeans has ultimately become the reality when Twelve European countries under the European Union (E.U.) have accepted Euro as the single currency of Europe enabling the Eurozone to become the strong player in the global financial market. This is by far the largest monetary changeover the world has ever seen. Since then it is servicing as the unit of account for all pricing and transactions. All the member countries have entrusted their monetary policies making power with European Central Bank (E.C.B.) thereby submitting themselves to the overall monetary discipline under the stable and growth Pact.

Assumptions:

With the combined population of three hundred million and many member countries having higher growth rates than the U.S. this common currency has many strong point & was likely to appreciate in the future against U.S. Dollar.

And its advantages like lesser transaction costs and exchange risk and higher acceptability , many countries of the European Union will be more accessible for trade with rest of the countries of the world.

Much like the U.S., Euroland will be some sort of the U.S. of Europe with a single currency and harmonized monetary policy will lead to near uniform prices, inflation and interest rates.

No longer can an exporter charge different prices for the same thing.

OTHER ASSUMPTIONS:

This currency will shift global portfolio to euro assets.

Bridge the economic gap between Europe and America and eventually challenge the economic supremacy of Dollar.

BENEFITS:

The most important implication of the euro for business is that there will be no exchange rate uncertainty in Euroland (conversion of currency while traveling across the European countries).

There is no cost of hedging against exchange risk.

The reduction in transaction & exchange risk cost has resulted in greater competition, increased transparency as well as greater opportunities for both exporter and importers.

The United Euro financial market will become cheaper and more liquid.

LIMITATIONS:

The exchange risk arising out of the Euro fluctuating against the Dollar will remain as it is.

The need for hedging will remain ever for an ordinary importer's even if one is buying from a German company, the cost calculations may go wrong for something happening in Italy or France would have a bearing on the value of the Euro against the Dollar.

In the face of an acute balance of payment difficulty combined with a fixed exchange rate system some European countries have experience recession and job courses while others may prosper, because of historical, ethnic, language and cultural factors, labor mobility on such a scale is absent in Europe.

REALITIES:

Though the initial take off was gorgeous but later on maintaining the standard become difficult. Realities soon started bifurcating from expectations. The Euro tuned out to be weaker against the Dollar.

With time, thereby weakening the European Economy. In fact instead of narrowing the gap between U.S. and Europe, the Euro has broadened the gap over the years. Neither it was able to provide shield against the sagging Dollar nor was it able to develop as an alternative currency to fight dollar.

REASONS : CHRONIC WEAKNESS

Since its launch in January 1999, the Euro has never been comfortable. The initial explanation was the unprecedented growth rate of the U.S. economy compared to Europe.

The traditional investment climate and labour market rigidities in Europe have although been responsible for poor performance of Euro.

More importantly it is the higher confidence of the investor community in Dollar compared to Euro made Dollar unable to sustain its reliabilities in contrast to Euro.

Time has also played a cruel game with the Euro. It was launched when the world economy has been witnessing a severe slow down and Europe was not an exception to it.

Much of the blames also goes to the ECB and its President Wim Duisenberg and his inability to read the market pulse and being late in cutting the interest rate. The reluctance of ECB to cut down interest rates was mistaken as a strategic step, however the reality was different. It is become of indecisiveness from taking a fast decision on the monetary policy became of participation of twelve Eurozone Central Bank members of the ECB council.

The value of currency is directly related to the strength of the economy that supports it. The "laisser fare Doctrine" computed with deregulation has enabled the Dollar to remain strong whereas Eurozone has always worked under strict government regulation and investors unfriendly practices.

A corporate profit tax imposed in countries like Italy, Germany and Belgium to an extent of forty % also created a barrier to smooth business running.

After the launch of the Euro, problem has taken a new dimension. Consumers in the euro region are expecting that they are taking advantages of their lack of knowledge of euro and raise prices.

Government has failed to create conducive environment to the smooth functioning of euro as a cash currency.

CONCLUSION:

The need of the hour for the eurozone is the implementation of microeconomic and structural reforms in the right direction and with the right motivation. Implementation of rigorous structural reform over a considerable period of time can enable the eurozone to combat this bottleneck.

Unless structural reforms are executed, attractive investments for the corporate world will not open up. Government has to play a pivotal role in this direction with regard to implementation of structural reforms strictly and work as a strategic coordination of economic policies.
 


Shipra Jain
MBA(Finance), CA(Inter)
Faculty Finance
ICFAI National College
Bhopal
 

Source: E-mail May 23, 2006

     

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