The Past and Future of International Monetary System by Jingyi Wang

Author:Jingyi Wang
Language: eng
Format: epub
Publisher: Springer Singapore, Singapore

Graph 4.4Changes of money multiplier in the Eurosystem (2006–2014)

4.2 “Creative, Ambitious, but Trapped”

Widely opposing views were expressed by economists and politicians on both sides of the Atlantic until the last minute of 1998 on the likelihood that the euro would be created and on the probability of its success if, indeed, it were established. Especially in the U.S., the Nobel Laureates Paul Samuelson, Milton Friedman, James Tobin and Robert Solow, as well as such well-known economists as Paul Krugman and Martin Feldstein even doubted that the euro would come into existence. Of course, when it became clear that the euro would indeed be created, most skeptics predicted that it would finally fail because the European Monetary Union (EMU) was not an optimum currency area so that “a single-fit-all, EMU-wide monetary policy would lead to serious problems for the member states”.

The euro and its backed system, is undoubtedly a creation, comparing with other currencies that spontaneously issued and endorsed by sovereignty. As the facts tell, a large number of prestigious economists had undervalued the creativity and will behind the regional currency.

From its very beginning, the euro has been an important international currency and is bound to become even more so in the future. The reasons are that the EMU: (a) is almost as large an economic and trading entity as the U.S., (b) has a large, well-developed and growing financial market, which is increasingly free of controls, and (c) expected to have a good inflation performance that will keep the value of the euro stable. If the international use of the euro were to match its share of would GDP, exports, and financial sector, the euro would become almost as important as the dollar as an international or vehicle currency.

It is unlikely, however, that the international use of the euro will soon match the EMU share of world GDP and exports. Obviously, as Dominick Salvatore pointed out, one reason is that the absence of a federal government drags the market for government securities in the process of integration, which is inevitably fall short of that in the U.S. Another reason is according to strict portfolio diversification motives, there is less of a reason for EMU investors to increase their holdings of euro-dominated assets, and while there will be a greater reason for them to increasing their dollar-dominated assets. They were, at least, proved in the European Debt Crisis that ten years after the euro’s full circulation.

Following the U.S. financial crisis in 2008, fears of a sovereign debt crisis developed in 2009 among fiscally conservative investors concerning some European states, with the situation becoming particularly tense in early 2010. This included Eurozone members Greece, Ireland and Portugal and also some EU countries outside the area. Iceland, the country which experienced the largest crisis in 2008 when its entire international banking system collapsed, has emerged less affected by the sovereign-debt crisis as the government was unable to bail the banks out. In the EU, especially in countries where sovereign debts have increased sharply

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