Time for the Euro to Grow Up

When the World Bank and the International Monetary Fund met in Ottawa last weekend to consider the changed prospects for the global economy, one of the most important voices in the international financial system was missing from the discussions. On January 1st 1999, the euro was created and instantly became the second most important global currency. So far, the biggest structural change in international finance since Bretton Woods has had little impact upon the global financial architecture. The financial crises which plagued the global economy throughout the 1990s have given rise to extended debate on the restructuring of the international financial system. An increased sense of responsibility for and role in the system could bring important benefits to Europe itself and could also make a vital contribution to international financial stability.

Richard Portes argues:

• ‘It is time for the euro to grow up and play its proper role in the international financial system’ 

• ‘the euro area has left it to the US to deal operationally with financial crises – even though the European contribution to rescue packages is just as big’ 

• ‘the euro area has had only minor influence on the debate over the ”international financial architecture'

• ‘There is no clear perception of Euro-area international responsibilities – national responses merely reflect the political concerns of individual member countries’ 

• ‘Decentralised supervision and regulation may raise Euro-area vulnerability to systemic risk’ 

• ‘There is little evidence of any capacity for monetary or exchange-rate policy co-ordination’ 

• internationalisation of the euro, especially through its effects on the capital markets, will promote European growth’

The euro area, Portes argues, needs to do more internally to improve financial supervision and regulation and its procedures for dealing with liquidity crises. But the external dimension is pressing: there is a need for coherent European positions on exchange-rate policy, the international financial architecture, and the euro as an international currency. 

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