The Emergence of the Euro as an International Currency

CEPR Discussion Paper Series Number 1741

Posted: 6 Feb 1998

See all articles by George S. Alogoskoufis

George S. Alogoskoufis

Athens University of Economics and Business

Richard Portes

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Hélène Rey

London Business School; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: October 1997

Abstract

The European Union will enter Stage Three of Economic and Monetary Union (EMU) in 1999. The development of euro financial markets and thickness externalities in the use of the euro as means of payment will be the major factors determining the importance of the euro as an international currency. As euro securities markets become deeper and more liquid and transaction costs fall, euro assets will become more attractive, and the use of the euro as a vehicle currency will expand; the two effects interact, as we demonstrate. We use a three-region world model as a framework for alternative steady-state scenarios. With forex and securities market data, we assess the plausibility of those scenarios and the implications for economic efficiency (welfare). We find that the euro may take on some of the current roles of the dollar, but the extent to which it does will depend on policy decisions and on the beliefs of market participants. The welfare analysis reveals potential quantitatively significant benefits for the euro area, at the cost of the United States and (to a lesser degree) Japan. During the transition to the new equilibrium, the main effect of the introduction of the euro will come through portfolio shifts that are likely to favour an appreciation of the new currency vis-a-vis the dollar (and the yen). Whatever the likely long-run outcome, the dollar will remain quantitatively dominant for some time because of inertia and hysteresis - with multiple equilibria and likely threshold effects, we would not expect a quick transition to a new equilibrium. The early period could see considerable instability associated with the emergence of the euro, especially if the United States were to resist any decline in the international status of the dollar.

JEL Classification: F3, F4, G1

Suggested Citation

Alogoskoufis, George S. and Portes, Richard and Rey, Helene, The Emergence of the Euro as an International Currency (October 1997). CEPR Discussion Paper Series Number 1741. Available at SSRN: https://ssrn.com/abstract=57607

George S. Alogoskoufis (Contact Author)

Athens University of Economics and Business ( email )

76 Patission Street
GR-10434 Athens
Greece
00 30 1 361 6259 (Phone)
00 30 1 362 4689 (Fax)

Richard Portes

London Business School - Department of Economics ( email )

Regent's Park
London, NW1 4SA
United Kingdom
+44 20 7000 8424 (Phone)
+44 20 7000 8401 (Fax)

HOME PAGE: http://faculty.london.edu/rportes/

Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER)

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Helene Rey

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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