European Capital Markets with a Single Currency

By Jean Dermine; Pierre Hillion | Go to book overview

3
An International Role for the Euro?

CHARLES WYPLOSZ


Introduction

The international role of the euro is the hidden agenda of Europe's long-planned adoption of a single currency. Some Europeans long to regain monetary leadership, either for political symbolism or because they believe that it is financially profitable. Some in the USA are concerned for exactly symmetric reasons. Central bankers, as usual, worry that they may lose control but relish the thought of the impact that their cryptic pronouncements might have on markets all over the world. Markets wonder if there is money to be made by moving faster than officialdom. In the crime and underground business, this may be seen as yet another opportunity for evading detection, although there are risks ahead. This chapter reviews and assesses the so far limited literature on the issue.

The next section puts the emergence of the euro into historical perspective. It recalls the replacement of sterling by the dollar. Section 2 analyses what are the defining characteristics of a world currency. Section 3 evaluates the euro's chance of reaching this status. Whether it is a desirable outcome or not for Europe is discussed in Section 4, while Section 5 speculates on the implications of a bipolar international monetary system. The last section briefly concludes.


1. A Brief Historical Overview

1.1. What is a world currency?

It is customary to look at an international currency from the viewpoint of the functions traditionally ascribed to a national currency: medium of exchange, unit of account and store of value.1Table 3.1, from Krugman ( 1991), summarizes the situation, distinguishing private from public use. By and large, the private use of an international currency is no different from the private use of a national currency: it is

____________________
1
For more details on the history of the international monetary system, see Eichengreen ( 1994) and Burda and Wyplosz ( 1997).

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