Jan 27, 2009

Business - Euro at ten

The euro, the European Union single currency that has turned 10 this month, is arguably the single most visible symbol of post-war European integration that enables the free movement of persons and services across national borders. In the current global financial crisis, however, the euro’s strength would be judged in terms of its capacity to weather exchange rate volatility, notwithstanding the fact that states such as Sweden and Denmark with national currencies, besides EU outsider Iceland, already view it as a potential safe haven. Since its launch, first merely for bank transactions and then replacing the legal tenders of 12 countries from 2002, the euro has eliminated the cost of currency exchange during internal travel and facilitated the comparison of prices in cross-border trade. The European Central Bank’s fundamental objective of ensuring price stability and keeping fiscal deficit below three per cent of GDP has occasioned some acrimonious divisions with national governments that are wedded to social security programmes. The potential political fallout of any dilution of the latter and the failure of countries that were the original architects of the ECB’s stringent rules to live up to them have injected a dose of realism in their application.

The euro is today the world’s second largest global currency after the United States dollar, with about a quarter of the share of foreign exchange reserves. The euro zone’s attractiveness as the world’s largest single trading destination has led emerging economies to rethink the greenback as the sole currency peg for exchange rates. At home, the appreciation of the euro is bound to have a dampening effect on exports that are already under pressure. Notwithstanding the limited room for manoeuvre for countries with profligate spending records and high public debt, the benefits of staying inside far outweigh the pain of exiting from the eurozone. To that extent, the predictions of doom that greeted the euro a decade ago have been belied. For EU countries that are yet to adopt the euro, which include the United Kingdom, Hungary and Poland, the message from it all is to create the political climate to expedite an early entry.

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