As growth slowed and unemployment increased in countries like Italy and Greece, investors feared for their solvency, driving up interest rates. Typically, there would be no solvency fears for governments under a fiat money regime because the national government could order the central bank to print more money. However, the European Central Bank's independence meant printing money was not an option for eurozone governments.
Higher interest rates increased unemployment and even caused deflation and negative economic growth in some countries. It would be fair to say that the euro contributed to an economic depression in Greece. The first stage of the euro was the European exchange rate mechanism ERM , under which prospective future members of the eurozone fixed their exchange rates to the German mark.
Germany has the largest economy in the eurozone and had a history of sound monetary policy since World War II. However, pegging exchange rates to the German mark may have created a bias in favor of Germany.
The idea that the euro favors Germany is politically controversial, but there is some support for it. In the s, Germany pursued a looser monetary policy to deal with the burdens of reunification. As a result, the strong U. The U. The German economy was relatively prosperous by , and European monetary policy was far too tight for weaker economies. Portugal, Italy, Ireland, Greece, and Spain all faced high debt, high interest rates, and high unemployment.
This time, monetary policy was too tight rather than too loose. The only constant was that the euro continued to work in favor of Germany. European Union. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content.
Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. That means that financing a deficit by an increase in liabilities to official holders of dollars is not very different from explicit borrowing in the form of security issues.
The main advantage is that American medium- to long-term interest rates are probably somewhat lower than they would be if the dollar were not a reserve currency. But that difference has to be rather small.
The major financial benefit the United States derives from the distinctive international status of its currency is seignorage: the accumulation of paper dollar currency abroad, since no interest is paid on such holdings. Private holdings of international assets are of much larger size than official balances. Of that total, a bit more than half was denominated in dollars, twice the amount held in the currencies of all 15 EU countries when intra-EU holdings are deducted.
How important will the euro be internationally as a private unit of account, means of payment, and store of value? Almost half of world trade is priced in dollars. That provides an incentive for corporations engaged in international trade to maintain working balances in dollars. That in turn would induce traders abroad to hold euro balances. But such balances are a small fraction of private international holdings of foreign currencies.
Cross-border investment and lending are of major importance. That is where the difference in financial structure between Europe and the United States becomes relevant. Although total financial assets are of about the same magnitude in euroland and in the United States, bank assets make up well over half of the total in Europe but less than half in the United States.
In other words, securities markets are much more developed in the United States, whereas banking is more prominent in Europe. It is true that the amount of government bonds outstanding in the 11 euroland countries is about equal to U.
Treasury bonds outstanding. But only one-fourth of corporate finance in continental Europe comes from capital markets. In the United States, the figure is about three-fourths. The advent of the euro could lead to the enlargement of securities markets in euroland. The stock exchanges of Frankfurt, London, and Paris, and probably others, are planning to create a unified trading system for equities. If the single currency encourages the development of deeper and more active markets for other securities of various maturities—ranging from commercial paper to bonds—that will in turn tend to attract more funds from abroad.
But those developments would also attract more borrowers from abroad. Thus one cannot predict whether greater securitization in euroland will tend to strengthen or weaken the foreign exchange value of the euro. In any event, this evolution toward greater securitization in euroland will not happen overnight. According to the Economist November 21, , p. EMU and International Cooperation. Even though they will have given up their exchange rates and balance of payments policies, they will retain their sovereignty, including fiscal policy and other domestic policies.
Thus the IMF will continue to conduct consultations with the member governments, as it does with Luxembourg, which, as part of the Belgium-Luxembourg Economic Union, does not have a separate exchange rate or balance of payments. On exchange rates, the relations with the IMF will be more complicated. When finance ministers and central bank governors meet, presumably there will be only one central bank governor from euroland, the president of the ECB.
The general question that is raised by this diffusion of authority has been expressed as follows: Whom does the U. The current unsatisfactory answer to the question seems to be that the treasury secretary would call three people in Europe: the current president of the Council of Ministers, a representative of the European Commission, and the ECB. A similar question would arise if and when it becomes desirable to coordinate economic policies among groups of countries, as has occurred from time to time among the Group of Seven nations.
It is reasonable to assume that these problems will be ironed out over time. Meanwhile, there is no reason why the United States should not welcome the establishment of the EMU and the creation of the euro. The vice president is basically a part of this charm operation that the United States implemented towards France in the past month and a half [ Related Books.
In , Vermont-born Joseph Smith claimed that an angel named Moroni The th Congress becomes the first held entirely under Republican control since the Eisenhower era. On January 4, , in his State of the Union address, President Lyndon Baines Johnson lays out for Congress a laundry list of legislation needed to achieve his plan for a Great Society.
On the heels of John F. Sign up now to learn about This Day in History straight from your inbox. Samuel Colt rescues the future of his faltering gun company by winning a contract to provide the U. Before Colt began mass-producing his popular revolvers in , handguns had not played a significant role in the history of Two trains collide in Sangi, Pakistan, on January 4, , killing between and people and injuring an estimated others.
This was the worst rail accident to date in Pakistan. The train Zakaria Bahauddin named after a holy man according to Pakistani tradition had a Mary Sullivan is raped and strangled to death in her Boston apartment. Sullivan would turn out to be the last woman killed by the notorious Boston Strangler, Albert DeSalvo, who had terrorized the city German Field Marshal Alfred von Schlieffen, mastermind of an aggressive German military strategy that will soon be used, in modified form, at the start of the Great War, dies on this day in in Berlin.
The son of a Prussian general, Schlieffen entered the army in and Live TV.
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