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Part - III

The ECB is an exception to this and does not have to adhere to the dictates of the individual Governments. The primary objective of the ECB is to bring about price stability. For this it has the right to regulate interest rates with the cooperation of the individual Central Banks, which are subservient to it. So many proponents believe that the new currency has the potential of bringing about unprecedented growth levels at Euroland.

Major Fears

But does this mean that there should be no apprehensions about the impact of the Euro?
Unlike countries like the United States, the Euroland with characterized by diversity in general economic environment language, ethnic origin as well as the low mobility of labour. The interest rates are fixed taking into account the inflation levels in all of Euroland but individual countries may have different economic conditions and any attempt to generalize by adopting a single interest rate would be counter productive for individual countries. Moreover, even today, the bulk of the businesses of majority of individual firms are based on domestic markets. Thus introduction of Euro is of little significance to them but they have had to shell out millions of dollars in upgrading softwares, printing invoices connected with the conversion of currency. Moreover financial institutions have been the worst hit as earnings from hedging have come to an end. According to a study, it is felt that there will be a restructuring of the financial system in Euroland with the bulk of weaker firms slated to be weeded out or taken over.
Lastly the Euro ability to weather a bout of extreme recession is doubtful primarily on account of the diverse economies that it is representing.

Will the Euro be successful?

Only time can answer such a question but preliminary results are encouraging. The Euro has been gaining against most currencies. Moreover weakening of the Dollar has also resulted in exporters from Third World countries shifted to billing system based on Euro. It is slowly starting to emerge as a store of value. But what is most important that Euroland has no other option but to persist with it even if the countries are faced with adversities. This is because the Act does not prescribe any manner for withdrawal of the currency and even if the countries go in for it, they will have to face severe exchange rate premiums, as they will have to admit volatility in their own currencies, if and when they shift. Apart from this the transaction costs for reintroduction of an extinguished currency will be too much for the individual countries to bear. Thus the Euro is destined for a future - a future, which will no doubt be interesting and exciting to watch.

Concluded.

* Contributed by -
Pinak Rudra Bhattacharyya,
Ist Year, IMT Knowledge Forum,
IMT Ghaziabad.