Friday, May 27, 2005

The Euro and the World Economy

C. Fred Bergsten
Director, Institute for International Economics
Presented at a conference on The Eurosystem, the Union and Beyond:
The Single Currency and Implications for Governance

An ECB Colloquium Held in Honor of Tommaso Padoa-Schioppa
European Central Bank, Frankfurt am Main, Germany, April 27 2005

The dollar has been the world's dominant currency for over a century chiefly because it had no competition, but the advent of the euro changes that situation dramatically. The euro will not realize its full international potential, however, until Euroland countries fully integrate their capital markets, speak with a single voice on all major economic and financial issues, and strengthen their economic performance. The exchange rate of the euro is in any event likely to rise considerably further over the coming months and years. But as a result of the further dollar depreciation that is needed to help reduce the huge US current account deficit, the euro will continue to experience a disproportionate share of global currency appreciation if Asian countries continue to resist adjustment of their own currencies, the inevitable portfolio diversification from dollars to euros stemming from the latter's growing global role, and the likely shrinking of the US-European growth differential (due more to a US slowdown than a European speedup). To achieve a more constructive outcome, the United States must reduce its budget deficit, the United States and Euroland must insist that the International Monetary Fund enforce its rules against currency manipulation in Asia, and Europe and Japan must stimulate the expansion of domestic demand in their economies. Additionally, Euroland and the United States should create a new "finance G-2" to manage the world's two key currencies and prevent destabilizing currency swings.
See full speech at

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