The Euro, the Dollar, and the International Monetary System

Abstract

On January 1, 1999, the euro came into existence as the single currency of 11 of the 15 member countries of the European Union (Austria, Belgium, Germany, Finland, France, Ireland, Italy, Luxembourg, The Netherlands, Spain, and Portugal). Britain, Sweden, and Denmark chose not to participate, and Greece was not allowed in because it did not satisfy any of the Maastricht conditions for admission. It is likely, however, that all four nations will join by the year 2002 when the euro is to completely replace national currencies and become the sole currency of the European Union. This is the first time that a group of sovereign nations voluntarily give up their moneys in favor of a common currency, and ranks as one of the most important events of postwar monetary history. In my presentation, I will begin by examining the position of the dollar as the undisputed international and vehicle currency at the end of 1998, at the eve of the introduction of the euro. Then I will discuss the reasons the euro became the second most important international currency from its very inception. Subsequently, I will examine ways to deal with possible damaging exchange rate misalignments between the euro and the dollar, the yen, and other important international currencies, as well as the experience of the euro since its introduction.