The Euro and the Stability of the International Monetary System

Abstract

The introduction of the euro at the beginning of 1999 promises to mark a turning point in the international monetary system. It is often compared with the transformation of the international monetary system in the early 1970s from the system of fixed exchange rates endorsed at the Bretton Woods conference to the regime of managed flexible exchange rates. But in fact its significance is deeper. The collapse of the Bretton Woods arrangements did not alter the power configuration of the international system. Both before and after the breakdown, the dollar was the dominant currency. The introduction of the euro, on the other hand, will challenge the status of the dollar and alter the power configuration of the system. For this reason the introduction of the euro may be the most important development in the international monetary system since the dollar replaced the pound sterling as the dominant international currency soon after the outbreak of World War I.1