(solution) CASE STUDY 14-2 The Birth of a New Currency: The Euro On January 1, 1999, the euro (¤) came into…

(solution) CASE STUDY 14-2 The Birth of a New Currency: The Euro On January 1, 1999, the euro (¤) came into…

CASE STUDY 14-2 The Birth of a New Currency: The Euro On January 1, 1999, the euro (¤) came into existence as the single currency of 11 of the then 15 member countries of the European Union (Austria, Belgium, Germany, Finland, France, Ireland, Italy, Luxembourg, Spain, Portugal, and the Netherlands). Greece was admitted at the beginning of 2001, Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009, and Estonia in 2011—making the number of EMU countries in the Eurozone equal to 17 (out of the 27 members of the European Union or EU in 2011). Britain, Sweden, and Denmark chose not to participate, but reserved the right to join later. This was the first time that a group of sovereign nations voluntarily gave up their currency in favor of a common currency, and it ranks as one of the most important economic events of the postwar period. From the start, the euro became an important international currency because the European Monetary Union or EMU (1) is as large an economic and trading unit as the United States; (2) has a large, well-developed, and growing financial market, which is increasingly free of controls; and (3) has a good inflation performance that will keep the value of the euro stable. But it is not likely that the euro will displace the U.S. dollar as the leading international or vehicle currency any time soon because (1) most primary commodities are priced in dollars, and this is likely to remain the case for some time to come; (2) most non-EMU countries are likely to continue to use the dollar for most of their international transactions for the foreseeable future, with the exception of the former communist nations in Central and Eastern Europe (which are candidates for admission into the European Monetary Union and may even adopt the euro before then) and the former French colonies in West and Central Africa; and (3) sheer inertia favors the incumbent (the dollar). The most likely situation will be that the euro will share the leading position with the dollar during this decade and also with the renminbi or yuan, the currency of China, after that. Although still officially inconvertible, China has already started rapidly “internationalizing” its currency by developing an offshore market in the currency and encouraging the use of renminbi in settling and invoicing international trade transactions. The World Bank predicted that by 2025 the euro and the renminbi will become as important international or vehicle currencies as the dollar in a new “multi-currency” international monetary system.