U.S.-European Union Relations: Economic Change and Political Transition

By Kramer, Steven Philip; Kyriakopoulos, Irene | Strategic Forum, July 1999 | Go to article overview

U.S.-European Union Relations: Economic Change and Political Transition


Kramer, Steven Philip, Kyriakopoulos, Irene, Strategic Forum


Conclusions

* The European Monetary Union (EMU) will affect the economic balance of forces between the European Union and the United States.

* The introduction of the euro as the currency of the EMU will aid participating European Union (EU) member states by eliminating transaction costs, exchange rate risks, and interest rate spreads across the 11 European currencies early in the coming century.

* The proportion of international transactions and assets held, in euros, could approximate that held in dollars within 10 years.

* The U.S.-European political relationship is increasingly disconnected due to the lack of a common external threat, with the United States being concerned about threats to global security and European states focusing on the EMU and unemployment problems.

U.S.-European relations are going through a period of fundamental readjustment. In the economic and financial arena, the introduction of the European Monetary Union (EMU) creates the conditions for a truly supranational European identity and, ultimately, a change in the economic balance of forces between the European Union (EU) and the United States. In the political arena, the U.S.-European political relationship is becoming increasingly disconnected.

The introduction of the euro, as the currency of the EU, is an event of historic importance for European economic integration and for the worldwide financial system. With the implementation of the first stage of this economic union last January, the EMU is transforming the world of business, commerce, and finance. Conversion rates of the 11-country national currencies have been irrevocably fixed, and the euro is trading in foreign exchange and money markets; the European Central Bank has started to operate; new financial instruments, including bank accounts, are issued in euros; and accounting, retail pricing, and business invoices in euros are used in parallel with national currencies. Euro notes and coins are being produced for circulation in 2002, when they will replace national currencies. By July 1, 2002, the euro will be the only form of legal tender in participating member states. With economic integration thus expanded, Europe's experiment with a supranational union is moving into a new phase. The relationship of the EU with the United States is likely to change, as Europe's growing financial, commercial, and economic clout affects the distribution of resources on a global scale.

The Effect of the EMU on the European Identity

The significance of the EMU in forging a more dynamic European identity should be evaluated in terms of its impact on the international economic system. The economic space of the EU involves 300 million inhabitants and commands a gross domestic product (GDP) larger than the United States' even though it has yet to match America in terms of per capita income. Internationally, the EU is the world's largest trading partner, but nearly two-thirds of international transactions involve the U.S. dollar. The EMU will alter these relationships.

For a number of reasons, the advent of the EMU implies an erosion of the dominance of the U.S. dollar in international trade and finance; the euro's importance will eventually match that of the dollar. By replacing 11 European currencies, the euro will become a key international reserve currency. More significantly, the absence of transaction costs, exchange rate risks, and interest rate spreads across the EU can stimulate the development of a truly integrated financial market in the whole range of financial instruments and activities, including securities trading, pension funds, retail banking, and insurance. According to estimates prepared for the European Commission, within 10 years the proportion of international transactions carried out in euros and assets held in euros will approximate the amount currently held in dollars. Portfolio shifts will also take place as the supply of financial assets in euros continues to grow. …

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U.S.-European Union Relations: Economic Change and Political Transition
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