7 The Euro: A Future International Currency? Kevin Boles, Frank McDonald and Nigel Healey The introduction of the euro adds an extra dimension to the international ®nancial system, introducing a new currency to rival the dollar as an international and reserve currency. Within the European Union, the signi- ®cance of monetary union for the twelve member states of the euro-zone cannot be overstated, as the mixed reaction among both public and policy- makers can testify. For some members of the EU, the euro is a symbol of the renaissance of Europe as the world leader in commerce and culture (Bergsten and Henning, 1996). For others, it is a necessary convenience that facilitates commercial development and greater competition across borders formerly protected by exchange and interest rate differentials (Baldwin, 1991). For businesses trading within the euro area, the use of the single currency will reduce transaction costs and exchange rate risk, both of which will raise ef®ciency, increase investment and effect greater com- petition (Emerson et al., 1992; McDonald, 1997). In some states, however, public disagreements re¯ected the opposition to the perceived loss of sovereignty and led, in the case of Denmark, to the outright rejection of the proposal in a national referendum. One of the political attractions of a single currency in Europe is the economic weight it offers to the EU in trade negotiations with the other powerful economies of the US and Asia (Bergsten, 2000). Over time, the euro is likely to become a reserve currency, replacing as it does the former domestic currencies of members of economic and monetary union (EMU) in the foreign reserves of governments. Moreover, the euro may come to rival the US dollar in money and capital markets, altering the nature of the international monetary system. This could engender signi®cant volatility in ®nancial markets, and raise yet again the spectre of trade wars and protectionist practices (Bergsten, 2000). International policy co-ordination and system management take on a much greater signi®cance in this con- text. Already, a desire to see the euro succeed has prompted internationally co-ordinated intervention to support the European currency in the face of ®nancial market volatility. Over the longer term, there is a very real possibility that world trade will be characterised by three main trading blocs, each with its own 2/,-#+ +1#%/1',+ '+ 1&# 4#+15'/01 #+12/5 +'15 '+ '3#/0'15 #"'1#" 5 /5 //#)) #1 ) 2)'!1',+0 /,2#01 ,,( #+1/) &11-#,,(!#+1/)-/,.2#01!,*)'+122("#1')!1',+",! /#1#" $/,* +122( ,+ ,-5/'%&1 6 2)'!1',+0 )) /'%&10 /#0#/3#"