The European Economic Community And The Euro

Dollar Essay, Research Paper

EEC and the Euro Dollar

The European Economic Community (EEC), also known as the common market, was established in 1957 through the treaty of Rome signed between Belgium, France, Italy, Luxembourg, the Netherlands, and Germany in order to achieve economic cooperation. “It has since worked for the free movement of labor and capital, the abolition of trusts and cartels, and the development of joint and reciprocal policies on labor, social welfare, agriculture, transport, and foreign trade.” Over the years, monetary union has been suggested by the members of the EEC and was finally attained on January 1,1999 when eleven European countries, which are now collectively referred to as Euroland, introduced a single currency, the euro. Since then, the euro has invaded nearly every sector of the world economy. The monetary revolution embodied in the euro involves far more then the elimination of 11 currencies and the distributions of colorful new banknotes and coins across Europe. “It entails the solidification of the European Union’s common market for goods and services, major structural changes in countries plagued by fiscal imprudence, and the reorganization of monetary policy in some of the world’s most advanced industrialized economies” The risks of implementing the euro consist of supply shocks and political discord. Although the ongoing risks of maintaining Economic monetary union may hinder the stability of the euro in the long run, the integration of the euro to the EEC as of January 1999, has so far proven to have a positive affect on the European economy and has allowed it to achieve its primary political and economic goals through its four core benefits: the reduction of transaction costs, the elimination of exchange rate risks, increased price transparency, and the creation of deep financial markets.

The Euro is the newly created currency of the European Economic Community, a currency that became legal tender on January 1, 1999. By 2002, euro notes and coins will replace the Austrian schilling, Belgian franc, Finnish markka, French franc, German mark, Irish punt, Italian lira, Luxembourg franc, Dutch guilder, Portuguese escudo, and Spanish peseta. These 11 nations will share a common currency, a single monetary policy, and a single foreign exchange rate policy. Currencies not only serve as a standardized value of measurement, so that we have a consistent way of expressing value, but they also function as an efficient means of payment. Also they serve as a store of value, allowing us to transport wealth easily over a distance and to store it for indefinite periods of time.

There are two main reasons for this monetary union within the EEC (European Economic Community), one being a political reason and the other an economic reason. The political arguments are that a single currency will further unite the European alliance, which was formed after WWII, by forcing Europe to act as a whole rather than as single states. This could perhaps eliminate nationalism and bring unity to this continent, which has been plagued by war twice in the last century.

The Economic reasons for the euro project can be found in the relatively poor performance of the European economies over the last twenty years or more. Europe has, for a long time, suffered form relatively weak economic growth. “Economic growth that trailed behind that in North America and Asia: productivity gains were weak; unemployment remained persistently high; and many European countries suffered form persistently high wage and price inflation. This was generally thought to be caused by relatively rigid and inflexible labor markets; a high level of government involvement in the economy; a less enterprising culture compared, in particular, to that in North America; and a poorer track record of innovation and research and development.”

The euro has given Europe one of the largest and most powerful trading blocs in the world. Although the euro doesn’t alter the fact that Euroland is composed of diverse and highly independent countries, it strengthens the economic and political ties of the region and its part in the world economy. Because of the success of the euro will ultimately be determined by the collaboration of EEC governments through the formulation of exchange rate policy to the harmonization of legal systems and security policy, the concept of western Europe as a single economic and political bloc is now more applicable than ever. The euro creates the second-largest single currency area in the world, one that follows the United States in total output. When and if Great Britain, Sweden, Denmark, and Greece join the euro area, Europe will easily surpass the United States in total economic output. Already, Europe is home to more people who are united by a single currency than is the United States or Japan.

Whereas the costs of a common currency have much to do with the macroeconomic management of the economy, the benefits are mostly situated at the microeconomic level. Eliminating national currencies and moving to a common currency can be expected to lead to gains in economic efficiency. The euro’s four primary and direct benefits are: the reduction of transaction costs, the elimination of exchange rate risk, increased price transparency, and the creation of deep financial markets.

The first benefit that has come about as a result of th