Internationalized euro increasingly prominent
As a currency that initially covered 14 member states of the European Union, the euro was officially launched on Jan 1, 1999, initially as an electronic currency. Euro bank notes and coins came into physical circulation on Jan 1, 2002, and following a two-month transition period, the euro officially replaced the currencies of the countries in the eurozone.
Today, the eurozone comprises 19 EU member states, with a population of more than 340 million, and it has become one of the most important symbols of European integration.
The European Monetary Union is closely related to the process of European integration. Although a broad idea of a single Europe emerged in 1970, a single currency was proposed for the first time in the 1992 Maastricht Treaty.
As the prominent player in the euro system, the European Central Bank administers the policies of the euro, and aims to ensure the independence of the euro and maintain price stability in the eurozone.
The introduction of the euro in the European countries, however, is more a result of historical opportunities and strong political will.
When the European Monetary Union was established, for instance, the eurozone still did not meet all the requirements of an optimal currency area. There were still distinct differences in the macroeconomic conditions and structures and lingering asymmetric shock risks among the EU member states. And due to the lack of an alternative currency, exchange rate policy and a regulation mechanism to handle asymmetric risks, there were huge potential risks of economic imbalance.
As a result, due to the 2008 global financial crisis and accumulation of risks, the EU was caught in a vicious circle of a banking crisis and sovereign debt crisis. After the global financial crisis ended, however, the EU tried to address the problems created due to the eurozone not being a non-optimal currency area.
And in order to lessen the negative impact caused by external shocks, the EU adopted some necessary measures such as implementing fiscal contracts, establishing a banking union and capital market union, carrying out various structural policies, and building a European stability mechanism. These measures were aimed at defusing the risks arising due to structural imbalances and turning the eurozone into an optimal currency area.
Therefore, the European Monetary Union has been further strengthened after a series of institutional building measures, and the euro has made tremendous contributions to the economic prosperity and stability of the EU. With more stable prices, lower transaction costs, a more transparent and competitive market, and closer international economic and trade relations, the EU has become the economic area with the highest level of integration in the world and one of the most popular destinations for investment.
Therefore, despite the European debt crisis, the euro is supported by an increasing number of Europeans. According to the latest polls, nearly three-fourths of the people in the eurozone favor the use of the euro while just one-fifth of them oppose the arrangement. In the EU as a whole, more than 60 percent people support the use of the euro.
Moreover, as a significant player in the international monetary system, the euro has become the second-largest international currency — after the US dollar.
Plus, as a global investment currency, the euro remains attractive because the eurozone’s economic fundamentals continue to improve and more international capital flows into the eurozone stock market — although international inves- tors’ enthusiasm in eurozone bonds has declined to some extent due to the asset purchase program of the European Central Bank.
The euro has also performed well in the foreign exchange market, which is reflected in its continuing appreciation against the US dollar and other major currencies. In the international bond and credit market, the euro’s scale of bonds and credit ranks second only to the US dollar. Given the euro’s importance as a global currency, about 60 countries use it or are willing to use it and correlate their domestic currencies with the EU currency.
However, the eurozone is yet to overcome all the ill effects of the global financial crisis. Although the euro is still the second-largest global currency, the changes in its various indicators do not conform to its internationalization index. Against such a background, the EU has begun strengthening the European Monetary Union with the aim of boosting the euro’s global status.
After all, a more internationalized euro will not only enhance the capability of the European Monetary Union to cope with external shocks but also will help stabilize the international financial and monetary system and build a more open, diversified and rule-based world economic and trade system.
The author is a research associate at the Institute of European Studies, Chinese Academy of Social Sciences. The views don’t necessarily represent those of China Daily.