Money Change Case Study

Money Change Case Study

(1). What are the implications of the establishment of the euro for (a) European consumers, (b) businesses based in the EU, and (c) businesses based elsewhere in the world?

According to the European Union, the benefits of the Euro include creating a single marketplace for consumer goods and services, making travel between European countries easier, creating a single financial market, integrating European countries politically, creating a macroeconomic framework, and advancing Europe’s international role (Rey, 2007). The benefits touted by the EU have been evident in the six years since the currency began circulating.

Transactions between the businesses in participating countries are done with a common currency with the same ease as transactions between states within the United States. As a result of adopting a common currency, participants have increased coordination with key securities in the government bond market and financial integration between member countries has increased as well. The financial markets in the euro participating countries have become more liquid, integrated, and diverse since the euro was adopted (Rey, 2007). It also benefited the businesses based elsewhere in world for same reasons such as ease of transactions and reducing the exchange rates.

(2).In your view, do the advantages of the euro outweigh its perceived disadvantages? Be sure to justify your answer.

The advantages of the euro outweigh its perceived disadvantages. Because the Euro replaced the currency used by so many individual countries and has been the subject of unilateral and bilateral exchange rate agreements, the Euro has become the second most important currency in the world, with the potential for competing with the US dollar. Equity price correlation has increased between participating countries since 2002. Non-participating countries have not seen the same increase in equity price correlation. A previously nonexistent corporate bond market has been growing between participating countries as well.

(3).What are the benefits to Britain, Sweden, and Denmark of staying out of the euro zone? What are the potential costs? Do you think these countries will eventually join the euro zone? Under what circumstances will they join?

The benefit to Britain, Sweden, and Denmark of staying out of the euro zone is that they do not lose control over the monetary policies within their own countries such as setting the interest rate. Many of the countries in the euro zone have dissimilar economies. If one of the countries has troubles such as economy and politics, the value of the euro could lower and it would affect all the countries in the zone.

Price stability, low interest rates, and good public finances represent ideal conditions to advance economic growth. By joining the euro zone, Britain, Sweden, and Denmark could increase a greater share in the influence over economic matters in Europe. These countries could lose both economic and political power in shaping future European economic integration if they continue to stay outside of the system. These countries will join the euro zone eventually for the above reasons. They will join the euro zone after they see the benefits of the euro and if the euro can be benefit to their countries.

(4).Look at the relative performance of the euro against the dollar since 2000. What does this tell you, if anything, about the viability if the euro? (The historic exchange rate between the U.S. dollar and euro can be accessed on the Web at http://www.x-rates.com/cgibin/ hlookup.cgi).

“Since its establishment on January 1, 1999, the euro has had a volatile trading history against the U.S. dollar. After starting life in 1999 at $1.17, the euro steadily fell until it reached a low of 83 cents to the dollar in October 2000. Its fortunes began improving in late 2001, when the dollar weakened, and the currency stood near a robust three-year high of $1.176 on May 30, 2003” (Hill, 2005). According the historic data, euro has been relatively stable against stable and higher value in past few years, which means euro is performing well and stable. Below is the data of U.S. dollar against euro from January 2008 to present.

(5).What are the implications of the euro gaining ground at the expense of the U.S. dollar as a major reserve currency for the world’s central banks?

One of the most addressed topics regarding the euro is the influence that will have on the U.S dollar concerning the percentage of dollars held in reserves around the world’s central banks. Currently more then half of the worldwide trade business is exchanged in U.S. dollars. The powerful euro could change the proportion of reserve holdings in U.S. dollars, and will become more of a participant