Research Paper, Macro And Micro Economics- Euro

Running head: RESEARCH PAPER, MACRO AND MICRO ECONOMICS- EURO 1

Research Paper, Macro and Micro economics- Euro

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RESEARCH PAPER, MACRO AND MICRO ECONOMICS- EURO 2

This paper focuses on the history of Euro, the purpose of Euro and the fluctuations of

Euro against the value of the U.S. dollar. Moreover, it looks into the challenges facing

common currency in the European Union. In early twentieth century after devastating and

demoralizing wars, leaders of European Economies focused on establishing sustainable peace

to unify economically in the long term perspective. In 1957, Rome Treaty was established

with the aim of unifying these economies. Under the treaty, European Economic Community

was formed. In 1969, European Economic Community commissioned a team to study and

establish a blueprint for monetary and economic union. The team was led by the prime

minister of Luxembourg. The policies were to be implemented by 1980. However, in 1970

there was a severe disruption in global currency market.

In the year 1989, the European leaders renewed the unification process. In this case,

Delors proposal was established. The project led to the introduction of European Central

Bank. This proposal was greatly accepted and integrated into the conceptual framework of

Euro as Europe Treaty (Dominguez, 2006). This proposal was effectively implemented and

resulted to adoption of Euro currency by eleven countries in 1999. The membership has

grown to seventeen economies.

The main objective of establishment of Euro currency is to maintain stable prices. In

this context, stable prices are paramount to the development of economic welfare and growth

opportunities. The mission of European Central Bank is to work with other European

Economies National Central Banks, to focus primarily on maintaining policies that support

pricing stability. Moreover, pricing stability in this context is defined as an annual increase

in the Harmonized Index of Consumer Prices of less than two percent (Balasundram, Tony,

and Hadley, 2011). Effective maintaining pricing stability, on the hand, ensures that the Euro

strengthens against other global currencies. Therefore, one of the primary goals of

establishing the Economic and Monetary Union was to control pricing instability within the

RESEARCH PAPER, MACRO AND MICRO ECONOMICS- EURO 3

European Union. However, the effectiveness of the Euro depends on the independent of

European Central Bank.

Therefore, use of Euro currency offers many advantages. These advantages include

elimination of fluctuating exchange rates and exchange costs. This is because it is easier for

firms to carry out trade across the border, and the economy is more stable. Moreover, the

economy grows, and consumers have more choice. Euro currency also motivates travel and

shopping of people in other economies. At global perspective, the euro gives the European

Union more influence as it is the 2

most important international currency after the US dollar

(Kaminsky, 2008).

In the year 1999, the Euro was at US $1.18. In June 4

, 2010, was Euro at US

$1.1971. This represents an increase of 1.4 percent over more than 10 years. The Euro

reached a high of about US $1.60 and a low of just over $0.82 in this period. However, it is

back where it started. Moreover, there is divergence on the level of inflation in the region.

The mean of the level of inflation in the European Union is 2.5%. On the other hand, the

usage and visibility of Euro had increased significantly from when introduced in 1999. In a

half, a decade, the involvement of Euro in global transactions beyond the European Union

improved from 20.8 % to 27.7 % (Kamps, 2006). However, the currency was by far

outshined by the U.S. dollar in the year 2004. In this time, the U.S. dollar engaged in at least

one part of a global transaction 88.7 percent of the time. In comparison, the euro was

involved in only 37.2 percent of all transactions (Goldberg, Engel, and Portes, 2005).

The challenges facing common currency in the European Union is the absence of a

coordinated fiscal policy. Fiscal policy in European Union is not centrally determined, like it

the case of United States. Therefore, in the case of European Union, each of the 17 member

Economies establishes its own governmental revenue and expenditure directives. However,

RESEARCH PAPER, MACRO AND MICRO ECONOMICS- EURO 4

these provisions limit spending in excess of three percent of annual GDP. Moreover, the

economies restrict to total debt to 60 % of GDP. On the other hand, this may the ability to

provide public services and build public infrastructure under Stability and Growth Pact.

These policies result to barriers of growth. Therefore, in the end weaken the credibility of

Euro. Moreover, this undermines the policies of European Central Bank; hence difficulty in

accomplishing the objectives of European Central Bank (Pelagidis and Desli, 2004)

RESEARCH PAPER, MACRO AND MICRO ECONOMICS- EURO 5

References

Balasundram, M., Tony, M. and Hadley, L. (2011). The Euro's Future: A Ten-Year

Projection, International Business and Economics Research Journal, 10 (7) 2-9.

Dominguez, K. (2006). The European Central Bank, the Euro, and Global Financial Markets,

American Economic Association Journal, 20 (4) 67-88.

Goldberg, L., Engel, C, and Portes, R. (2005). Trade Invoicing in the Accession Countries:

Are They Suited to the Euro? NBER International Seminar on Macroeconomics, 357-

402.

Kamps, A. (2006). The Euro as Invoicing Currency in International Trade.

Retrieved May, 02 2013, from http://www.ecb.int/pub/pd£'scpwps/ecbwp665.pdf

Kaminsky, G. L. (2008). Leading Indicators of Currency Crises, Staff Papers – International

Monetary Fund, 45 (1) 1-48.

Pelagidis, T. and Desli, E. (2004). Deficits, Growth, and the Currency Slowdown: What Role

for Fiscal Policy? Journal of Post Keynesian Economics, 26 (3) 461 - 469.

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