The European Economic Community And The Euro — страница 3

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incorrect since prices are determined by the interaction of supply, demand, and regulation in a wide variety of competitive environments. Therefore, the introduction of a common currency in Euroland does not eliminate price differences. Finally, the creation of deep financial markets is the fourth and last direct benefit of the introduction of the euro. “Before the euro, efforts to match the immediate financial needs of consumers with the investment requirements of savers were plagued by the psychological and economic costs of 11 national currencies.” Every type of financial device such as government bonds, commercial bank loans, and stock was listed in a national denomination. This fractured financial markets and discouraged foreign investment and would have done so even

without transaction costs and exchange rate risks. The euro revolutionizes this situation. Since January 1, 1999, Euroland’s major exchanges have listed their financial instruments in euros. To investors and borrowers, such developments have made the European financial markets broader, more accessible, and more liquid. Because this promotes unrestricted international trade in the world’s single most important market, the market for money itself, it is considered one of the euro’s core economic benefits. Together with the four primary and direct benefits attained from the euro, there are also other economic benefits that are more indirect. They involve: macroeconomic stability, lower interest rates, fundamental structural reform, the creation of a new global reserve

currency, and increased economic growth. The euro has brought macroeconomic stability to unstable European nations. Many of the EEC’s fifteen member countries have battled inflation. “This confuses buyers and sellers, increases borrowing costs, raises the effective tax rate, sends negative signals to investors, and creates gross market inefficiencies.” However, the euro has introduced a new regime of low inflation and macroeconomic stability from many Euroland countries. According to some experts, this is virtually guaranteed because Euroland now possesses the most independent central bank in the world, the European Central Bank (ECB). Central banks steer a country’s inflation rate by using a variety of monetary policy instruments to lower or raise the general level of

demand. The more independent a central bank, the less likely it is to succumb to the political pressures of its government to allow an economy to grow too fast or to finance excessive public expenditures which in turn leads to lower inflation. Yet history has shown that the central banks of many Euroland countries are not immune form political influence. That is precisely why the euro may be able to maintain long-term regional stability. Lower interest rates are another one of the larger economic goals that the EEC is hoping that the euro will achieve. To the extent that the euro lowers inflation, it also exerts downward pressure on interest rates. Investors buy bonds only if they are sure that the money they receive in the future will result in a percentage return that is higher

than the inflation rate. Investors consequently demand lower interest rates from countries with greater price stability. This benefit is particularly important for countries with poor inflation-fighting records. These countries now benefit form reduced inflation expectations because of the tight goals and determination of the new European Central Bank. Also, the euro brings lower interest rates by reducing exchange rate risk. The euro encourages structural reform in Europe. Countries wishing to qualify for the euro had to push their economies into shape by meeting the convergence criteria set forth in the Treaty on European Union. The criteria outlined in the treaty are: countries must have a rate consumer price inflation no more than 1.5 percent above that of the three countries

in the EU with the lowest such inflation; countries must have a ratio of general government borrowing to GDP no greater than 3.0 percent; countries must have a ratio of gross government debt to GDP no greater than 60 percent; countries must have a nominal interest rate on long-term government bonds no more than two percent above that of the three EU members with the lowest such rate; and countries must be members of the European Monetary System and their currencies must trade within the normal margins of fluctuations of that system. This criteria was created to ensure that any country joining monetary union was fiscally responsible and that participating countries agree to a single monetary policy. In the future, countries that have qualified to be a part of Euroland must adhere