The impact of the Euro in the modern economy context.

Paun, Dragos

Implications of the Enlargement of the Eurozone

In the process of the EU enlargement, each new state is subjected to a clause through which euro adoption is mandatory when the state in question meets the convergence criteria of the Maastricht Treaty. After the accession wave of 2004 the new member states have set diferent target years for the accession into the Eurozone according to each country profile as they were obliged to do so, unlike Great Britain and Denmark, who have the opt out option. (1) Slovenia became a member of the eurozone in January 1, 2007, followed by Malta and Cyprus in January 1, 2008, Slovakia in January 1, 2009 and Estonia in January 1, 2011.

Some of the states with a better evolution of fixed exchange rates and better fiscal policy indicators intended to adopt the euro faster. We must mention that EU member states from Central and Eastern Europe apply different exchange rate regimes, introduced through reforms from the first half of the '90s. For example, Poland and the Czech Republic have floating exchange rates, thus the fluctuations have to be limited to the levels established through the ERM II. Lithuania has a currency board monetary system, in which the monetary authority ensures fixed rates for the exchange rate (2). The monetary regime of a state determines the necessary adjustment degree required for entering the eurozone. Unlike the states participating in the eurozone, who limited the liberty of their monetary institutions during the creation of the EMU, the states that hold currency board monetary systems, which imply the existence of strict fiscal discipline, must assign more space for maneuvers to the institutions managing the monetary policy. The possibility of maintaining the currency board regime during the participation to the ERM II was accepted by the ECB and was used by Estonia and Lithuania, who entered the ERM II in 2004 and Latvia, which joined in 2005.

All new EU member states have a public debt below 60% of the GDP, Estonia even 10.1%. Instead, some countries in the eurozone exceed government debt with 70% of the GDP.

The budget deficit criterion is met especially by the Baltic States. In part, reducing the budget deficit is a result of dynamic economic growth in these countries in recent years, fact which is reflected in increased revenues. Long-term interest rates have decreased due to economic policy reforms, competition in the banking sector and increased credibility of public policies in these countries, especially thanks to joining the EU. In this context, the states offered confidence to international investors, leading to lower interest rates. Although this has not led to a massive increase in direct investment, (3) opportunities for low-cost loans were created. Regarding inflation rate as a convergence criterion, it varies according to each state's economy. (4)

The European Commission assesses developments in each member state in the process of meeting the convergence criteria. In this technical process, single currency introduction holds political symbolism. The case of Lithuania, which was not considered fit to become a member of the EMU because of exceeding the inflation rate by 0.1%5, may cause a debate on the significance of the convergence criteria, the concept of sustainability and equal treatment all EU member states, whatever their size and economic power. In addition, a strict interpretation of the criteria applied to new member states in the context in which the founder states violated the SGP rules may raise questions on the application of unequal treatment within the EU-28.

One of the most important consequences of EU enlargement is the increased economic and social diversity. The new member states have realised, until the economic and financial crisis of 2008-2009, a faster economic growth compared to eurozone members. The economic development of these countries is the result of economic integration between economies with different degrees of development. Even if this process depends on national policies, economic integration involves processes such as capital flows and labor migration in the more developed member states. Even in the favorable conditions in which the new member states have reached a share of services in their GDP comparable to the EU average, there are still important differences to be noticed.

Gaps show differences in productivity and at the level of economic structures, and stress the importance of flexibility of the new member states' economies. This is a decisive factor when facing economic shocks and for sustainable development. Flexibility can be assessed by analysing the labour market, wages and other variables. (6)

The Euro. Impact in the current monetary system context

In normal circumstances, the function of a currency is limited to the area in which it is issued. The currency becomes international when it holds a significant role outside the original jurisdiction and it is used by foreign agents. The factors that contributed to the consecration of the international status of the euro were the stability and reliability, the size and strength of the euro economy and its integration in international terms. (7) The role that the euro plays internationally is that of an investment, reserve, anchor, transaction currency and invoice type of currency. (8)

The advantages of a currency's international status include: implicit transfer of resources equivalent to interest-free loans, stimulating the macroeconomic policy flexibility thanks to the ability to rely on own currency to finance the external deficit of payments. We also mention the status and prestige that the global market dominance involves and an increased influence derived from other economic agents' monetary dependence.

The option to call for a particular currency, which internationalises its role, is based on three levels. First of all, in the initial phase of internationalisation, a decisive role is played by the confidence in the currency's value and the stability of the home economy. Then, an important attribute is the degree of liquidity, which in turn is based on a large financial market, characterised by diversity and flexibility. Thirdly, the currency must be based on an extensive trading network, i.e. it has to be widely accepted and traded. Thus, the higher the volume of transactions taking place in and with an economy, the higher the positive effect of increasing the size and reducing costs from using that currency. This aspect is defined as the network effect and it refers to the fact that the behavior of an economic agent depends on strategic practices adopted by other agents in the same network.

Ever since its introduction, it was estimated that the euro would gradually acquire an international role. The extent of this role remained to be seen. The transition from the pound to the dollar as an international currency used predominantly took place gradually during the interwar period, the dollar supremacy culminating at the end of the Second World War. In 1973, through the collapse of the Bretton Woods system, the first signs of the weakness of the dollar appeared. With the end the dollar supremacy, the demand for dollar reserves decreased, and states opted for other anchor currencies. By introducing the EMS in Europe, the international profile of the German mark increased. However, many countries continued to relate to the dollar and the rapid growth of global trade and financial markets as a result of globalisation and liberalisation in recent decades led to an extensive use of the dollar in foreign exchange markets. (9) Discussions referring to a strong currency gave off the idea that this currency must acquire an international status. Some countries, however, such as Germany and Japan, deliberately discouraged the international role of the national currency, especially as a reserve currency, which suggests that it is not a decisive factor (10). Factors to be taken into account in this context are the impact on financial markets, commodity prices and the monetary policy. Financial benefits may come from two sources: increased volume of trade implies lower costs of trading on financial and foreign exchange markets. Since these factors imply lower costs for goods, services and financial instruments, positive effects for the demand are taken into account. Secondly, states that issue currency that has an international role enjoy certain advantages. Thus, economic agents in that country, both public and private, which take loans, shall enjoy lower funding costs due to the international demand for their bonds. A state with an international currency has the ability to finance the budget deficit through bonds denominated in its own currency, since other countries are willing to accept a large amount of debt at low cost to the issuer. This "exorbitant privilege" (11) is considered one of the reasons why the US current deficit has grown without coercive measures. Since this privilege destabilises financial discipline and allows the accumulation of financial imbalances, its importance is relative.

Besides financial implications, the international role of a currency has a symbolic value; thus, strong currencies are seen as a manifestation of power. (12) Regarding the euro, this symbolism is relative, given that this was not the motivation for introducing the single currency. The euro is a currency used by many states, involving a growing awareness and contributing to the supranational European identity. The euro was introduced to promote integration and economic welfare in the member states. With this aim, the mandate of the European System of Central Banks (Eurosystem) is to maintain stability in the euro area. Regarding the euro's international role, the ECB has adopted a neutral position, arguing that encourage or disruption of the euro's international status directly is not feasible nor desirable. This role must be the result of market forces acting on the basis of economic and financial developments. The fact that the ECB carries out the mandate to maintain price stability in the euro area contributes indirectly to the use of the euro internationally.

Another aspect of the international role of the euro is its use in third party countries for its purchase power. The residents of several developing countries with transition economies have a part of their finances in foreign currencies or foreign currency bank deposits. After the introduction of the euro, the monetary and financial institutions of the eurozone issued significant quantities of bills outside the eurozone. This figure is probably even bigger in reality, taking into account other transfer channels, such as tourism or the black market.

[FIGURE 1 OMITTED]

The contribution of the official sector to the international use of foreign currency consists in using it as anchor currency, intervention currency or for denominating exchange reserves in that currency. These three roles are related also because the euro indicates a geographical concentration in European countries that are not part of the eurozone. The option for a particular currency as anchor currency is important and involves a spillover effect on the use of the same coin for currency reserves and as intervention currency. Reporting national currency to another currency reduces costs and risks of using that currency and acts as an incentive for its internationalisation. For the countries of Central and Eastern Europe, the option for reporting their currency to the euro was something to be expected. (14) In contrast, the euro is not the best option for Asian economies, mainly because the eurozone is not their main trading partner, and the dollar already held this position.

The above table shows a geographical preference of states partially or totally reporting their currency to the euro. Starting with December 2005, 40 out of 150 countries using the system have used the euro as a partial reference point or as a pegging currency. 18 of these countries are in Europe and 14 in the French franc zone. (15) For countries not participating in the ERM II, reporting their currency to the euro is a unilateral decision and does not imply any obligation from the Eurosystem. Instead, for countries participating in the ERM II, currencies are maintained between the fluctuation lines previously established, of 15%, around a predetermined parity between the euro and the currency in question. Two of the ERM II states, Latvia and Malta, have established a margin lower by only 1%, respectively 0 (Malta adopted the euro in January 2008).

[FIGURE 2 OMITTED]

In what concerns the use of the euro for reserves, the states in question have considered several factors: the pegging currency, the direction of commercial flows and the invoice type of currency used, the denominated currency for loans, strategies to avoid risks, and political considerations. If we take a look at the states that use the euro for reserves, we notice a preference of developing countries 21% higher than that of developed countries. In analogy with the case of the euro as pegging currency, we notice a regional preference for the euro in Eastern Europe countries. It is considered that Russia has one of the largest foreign exchange reserves denominated in euros, about one third of the total foreign exchange reserves, fact reflected in the commercial relations report. (16)

Moreover, some countries in South America hold a significant part of their reserves in euros. This option is motivated by commercial flows and financial links with the euro area. On the other hand, oil-exporting countries in the Middle East hold a small share of their reserves in euros, although the idea of diversification is taken into consideration. The functions of the euro as a pegging and reserve currency are related to the intervention function. While few central banks make their intervention currency known, statements of the authorities show a preference for the euro in European countries. (17)

Euro--dollar relationship

We have analysed the euro-dollar relationship from the moment of the de facto introduction of the euro in 2002. As stated in the previously, the international role of a currency is based on several basic factors. Firstly, the economic strength and stability of the currency in the country of origin play an important role in the emergence process of a currency on an international level. In a position which states that the value of a remains the same or increases, the currency is preferred as a reserve currency. It is also used as a measurement unit and exchange tool if the currency remain stable. Thus, currency stability, i.e. a low and stable inflation rate, is relevant to its international status, while a sustainable economic policy is essential for achieving this goal.

The second important factor for the emergence of a currency is the size of the home economy. Size gives other positive effects besides the advantage of reduced susceptibility in the case of external shocks. The larger the economy, the greater the absolute flows of private investments, the emissions of government bonds and trade. These large flows exert pressure on international transactions to be denominated in local currency. This context has a spillover effect, emphasising the role of international currency: if trade is invoiced mainly in a certain currency, that state may decide to report its own currency to that currency and to create reserves. For example, the US dollar became the main billing currency for goods trade, becoming the most effective exchange option, widely accepted and with low transaction costs.

However, the size of the economy is not a sufficient condition for a currency to gain an important international role, an example being China, which became in 2010 the second economy in the world. One relevant reason is the immaturity of local financial markets and the lack of capital convertibility. (18) In view of the international acceptability of a currency, foreign residents must be able to acquire, store and dispose of financial instruments denominated in that currency. This requires capital and accessible financial markets, which shows the third factor necessary for the international status of a particular currency: a broad, solid and properly regulated local financial system.

Even in the conditions of a stable value, a broad economy and strong financial markets, a currency requires considerable time to be accepted internationally. For example, it took the US dollar several years to surpass the pound. This is because the internationalization of a currency does not occur simultaneously in all its aspects. The reserve currency function is developed in the beginning, alternative currency being then used in other areas as well. Thus, the currency must overcome inertia and modify already established practices on externalities and functional synergies related to them. (19)

Externalities refer to the convenience and cost advantage to make use of a currency widely used by other economic agents. Therefore, the more widespread the currency, the more attractive it is. Functional synergy refers to the advantage of using for a function already a currency already employed in a related function. Thus, if a currency is accepted as payment, motivation to use it as a reserve currency increases. In order for a currency to achieve international recognition, it is necessary to destabilise the currency already holding an international status, given that in equal conditions it is considered that the already accepted currency will have a decisive advantage.

After the introduction of the single currency, some analysts affirmed that the euro has a significant potential to play an international role. (20) The euro was expected to be welcomed on the international scene, even if it had to demonstrate a certain level of stability, a condition made possible through the independent mandate of the ECB to maintain price stability with a positive effect on currency stability. After the introduction of the euro, economic forecasts attributed to the US a faster and more favorable growth trend due to low unemployment and favorable framework. At the same time, it was predicted that failure to achieve structural reforms in the eurozone in due time could reverberate negatively on economic performance. (21) On the other hand, forecasts showed that the euro area would enjoy greater stability, while the US government debt would increase and the budget deficit would raise question marks regarding the dollar's stability. (22) In conclusion, there were sufficient signals meant to show that the euro would be well received internationally, that it would gradually develop to that level but without putting the dollar supremacy at risk.

Official use of an international currency is dictated by the private sector. When the euro was introduced, financial markets were fragmented. The euro exerted the necessary pressure to harmonies them. Moreover, in 1999 the Financial Services Action Plan was introduced, (23) a legislative program largely completed in 2004 with the purpose of removing the obstacles that stood in the way of financial market integration.

In what concerns exports outside the euro area, the predicted figure was 58% after the creation of the EMU. This was based on invoice operations in currency of the EMU participating states in the '90s. In 2004 this figure was confirmed, the role of the other currencies being taken over by the euro. The use of the single currency has also increased in the case of imports, where it is still lower compared with exports. Although initially the use of the euro in the service area proved to be slow, its share has gradually increased, at the same time with the share in the goods area. The exception was Greece, where service exports with invoice currency in euros remained limited, given that most of these services included shipping, which traditionally used the dollar.

Among the countries outside the eurozone, new EU member states have intensified the use of the euro as invoice currency. It was expected that the new EU members would make transactions in euros, given that the currency would be used in the future in these countries. Thus, transaction costs are handled by both countries equally and are not exposed to fluctuations of national currencies. Outside Europe, the euro is used as invoice currency on Asian markets, but this use remains minor. Euro performance from the perspective of the exchange rate shows that the currency started from an initial value of $1.17, dropped to $0.83 at the half of 2000, and continued until 2002 at a level below the euro-dollar parity. This situation changed in 2004 when the euro went back to $1.35 while maintaining above the dollar level. (24)

In analysing the international role of a currency we should consider, in addition to the exchange rate, the currency's use by public and private economic agents. Central banks have adopted the euro for the intervention policy as pegging currency or as part of foreign reserves. In the absence of political pressure, banks choose the currency that had the largest contribution to managing exchange rates and the monetary policy.

Romanian to English translation

According to the ECB, the euro's international role is characterised by regional dispersion. The dollar holds supremacy as the global transaction currency. This is due to the large size of the US economy and low transaction costs. The dollar is the preferred currency in invoice operations, representing about half of the total exports worldwide and thus doubling the total US exports. The German mark used to cover 15% before the introduction of the euro. This role was taken over by the euro after 1999. Through the EU enlargement in 2004 and 2007, the new member states were obliged to adopt the euro in the future. The moment of adopting the single currency depends on the ability of meeting the convergence criteria set by the Maastricht Treaty.

Euro supporters affirm that the trajectory of the euro is favourable thanks to the EU enlargement in Central and Eastern Europe, a process through which the single currency will have a trading area larger than that of the dollar. (25)

When the single currency was introduced, it was expected that it would occupy the second position internationally, after the dollar, fact that was confirmed. The euro surpassed the role played by the German mark in the '90s and in some sectors it surpassed the combined role of the currencies it replaced. Its influence is more pronounced in the region close to the euro area, according to a geographical preference. Therefore, the prediction that the euro does not destabilise the dollar supremacy is correct (26) but we cannot eliminate the idea that in the future the euro may gain a position equal to that of the dollar. Some analysts suggest creating an international monetary balance between the euro and the dollar, in which each currency will have a share equal to 40% in a period of five to ten years.

The European Banking Union

The European Union and the European Economic and Monetary Union have been suffering in the last years from a major crisis, which has affected the image of the Euro. The countries that are part of the EMU have realized that the currency is going through a crisis and have tried to find solutions. At the very creation of the EMU there have been voices that argued the fact that the EMU has limited mechanisms and that the fiscal policy can not work with any cohesion to the monetary policy.

The EMU has reached one its goals, the strengthening of the common market and has led to multi-national corporations that extend beyond national borders. Foreign Direct Investments have increased among the member states. But 11 years after the introduction of the euro it was also proved that the Growth and Stability Pact and other mechanisms that were in place did not work. One of the answers to the question of what went wrong, especially after the Crisis in Cyprus, 2012, was the lack of overseeing the banking sector, which is one the keys in a strong economy.

European leaders have assumed this issue and as solution they are working towards a banking union, which would regulate and supervise the trouble banks and also major financial institutions at a supranational level. Currently, the banking union refers only to the euro area, but the main aim is to include all Member States.

The creation of a banking union favors the Member States from two points of view. First of all it provides stability by weakening the link between heavily indebted governments and troubled banks, secondly, in the long term, the European banking system will become more sustainable. Having a strong banking system to support the currency could lead in the long run to a situation where crisis such as the last could be avoided.

Unfortunately, the creation and implementation of a banking union is much more difficult than its conceptualization. The European financial system, the banks have a central role as providers of about three quarters of total loans, with a very large influence on the national economy. Thus, their supervision involves technical problems, due to differences in national banking procedures from state to state and the area that it has to cover (the euro area/EU). Besides technical difficulties, their supervision may be complicated by the degree of subjectivity in this area, affecting the loan mechanism, which affect growth and jobs. Due to this, Member States have so far avoided the creation of such a union, but the main reason behind this decision is the severity of the euro crisis and the pressure on the Euro.

As already mentioned, the proposed banking union, currently covers only the euro area, although it is desirable that in the future it would include all EU member states. But at the moment this is impossible because of political implications, see the position of Britain. This decision is currently the best option and can solve the euro crisis. However, the disadvantage is the difficulty of coordinating the relationship between the euro area and the outside area and the relationship between central banks.

Although this option seems the most optimal, Britain's "opt out" raised many questions, since the decision to leave aside the financial center of Europe, London, could have negative effects on bank union. In this way, there is a risk of two centers of financial supervision, leading inevitably to poor regulation, which would opt for the more flexible rules available. From another perspective, the creation of a single supervision throughout the Union can be considered a sensitive element. For the success of this project there is a necessity to have a proper structure and to avoid "desire" of an entity of the Euro zone to exercise control over the entire EU. (27)

The financial crisis has shown that an extremely interconnected and integrated area, such as the Euro zone, and the European Union requires a strong institutional framework. An extremely important element for strengthening of the institutional framework is creating financial banking union, and the first step is the implementation of the Single Supervisory Mechanism (SSM).

This mechanism consists of competent national authorities and the European Central Bank, but there is also the possibility for countries outside the euro area to take part in this new concept. SSM will be implemented in 2014 and will operate as a system that assists national supervisory authorities, but at the same time possesses a powerful decision-making center. Through this mechanism all banks in the euro area will fall within SSM, meaning about 6,000 banks. However, the fact that all banks in the euro area will fall under SSM, does not imply that the ECB will conduct direct supervision of all banks. This system is highly decentralized, as knowing the competent national authorities operating environment, but the ECB shall define provisions and surveillance system, and most importantly will have the power to initiate direct supervision of any bank or group of banks, when deemed necessary. (28)

The way the powers between the European Central Bank and national authorities will be divided not yet fully determined, but the fact is that the ECB will have powers to conduct investigative activities and authority to order and apply corrective measures, fines and including the possibility of closing a bank request. However, national authorities will continue to have a role in monitoring. (29)

Fiscal Integration--a possibility?

The European Union is seen by some critics as an unusual entity, as monetary policy is decided at European level, while fiscal policy is left to the national states. We have argued in this article about the controversial decision to split the two policies. Until recently, the idea of a fiscal integration was discussed only in academics and "think tank" sites, without having a major effect on the process of developing policies. But the financial crisis has forced European countries to turn the idea of a fiscal union into a goal. But there are also conflicting visions, Steve McKay believes that fiscal policy must fall within the exclusive competence of national states, arguing the lack of support from citizens which could bring long-term damage Monetary Union. (30)

Clemens Fuest and Andreas Peichl proposed five main elements of a possible fiscal integration: 1. fiscal rules for member states, as well as rules on the coordination and supervision policies; 2. crisis resolution mechanism; 3. joint guarantee for debt; 4. fiscal equalization and / or other mechanisms. However, the idea of a fiscal integration is far from being defined what it means or how it should be done, raised a number of questions and discussion, without giving a clear idea of the direction and sure to be adopted in this matter.

The ability to transfer part of European financial responsibility has raised a number of questions, however, most Member States of the European Union considers that the need for budgetary oversight and financial default is necessary for the success of the euro area. By 2008, countries have accumulated significant private and public debt, thus affecting the entire euro area. This vulnerability has been based on the following reasons. First EU monetary policy combines centralized policy with decentralized responsibility for the majority of economic policies (the responsibility of national states), and there is no centralized policy based on budget or centralized budgetary capacity. Secondly, the Member States did not respect the provisions of the GSP. Moreover, the coordination of national policies was based on coercive instruments with limited impact. Third, the failure of financial institutions had an extremely negative effect on public finances, as these institutions play an important role in stimulating an economy and the sustainability of public finances. Central banks increase money supply in 90 years, and new approaches to risk assessment led to an excess of global liquidity on an incorrect assessment of the risks to public and private documents and credit expansion, thus fueling the already existing property bubble.

In the last four years the EU has adopted a number of decisions on the supervision and regulation of financial institutions, but it has also developed an ambitious project for financial reform in order to strengthen and stabilize institutions that have proved particularly vulnerable during the economic crisis. The financial reform program is based on a report prepared at the request of the European Commission, by Jacques de Larosiere, former managing director of the IMF and Governor of the Banque de France (31). In the report, it was proposed a new system of financial supervision, complemented by an Early Warning Mechanism (EWM), led by the European Central Bank. EWM can be an added value to the policy process, since its purpose is to detect vulnerabilities and risks to avoid potential crises.

Another important element for strengthening the financial institutions of the European System of Financial Supervisors, it is composed of three European Supervisory Authorities "European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets (ESMA)--and from a macro-prudential supervisory body, the European Systemic Risk Board (ESRB)." (32) one of the problems faced by EU financial policy refers to the differences in the financial rules and enforcement methods the supranational provisions in this area. The purpose of this system is to supervise, in cooperation with national authorities, harmonization and ensure proper performance and strict new requirements.

In the last four years the EU has implemented a series of tools to strengthen financial institutions and create a stable environment, however, a classic fiscal integration can not yet be applied to the euro area. At the same time, we must recognize that European countries have taken important steps to ensure economic and financial stability. One of the elements is important to the economic stability of the European Semester, the annual cycle of economic policy coordination. The European Semester focuses on the first six months of the period in which European states coordinate their Budget and economic policy objectives according to European standards. The first step is when the Commission adopts the Annual Increases in Growth, usually at the end of the year, and it establishes priorities for public finances and economic growth. Even if the initial report is based on general recommendations for all states in the final phase, the Commission shall prepare specific recommendations for each of them, over which nation states give their acceptance and the Council approves them.

To address shortcomings fiscal coordination, the European states have adopted two complex projects Two Pack and the Treaty on Stability, Coordination and Governance in the EU.

Two Pack will come into force in 2014, and the first drafts of the national budget will be delivered to the Commission on October 15, 2013. Transposition of provisions will be made easier, since it applies directly, and therefore does not need to be transposed into national law. The two regulations are based on Six Pack and apply only to the euro area, the first regulation refers to strengthen coordination of national budgets, and the second regulation to improve fiscal oversight. More specifically, the first regulation refers to the direct supervision of national budgets.

Due to the "spill-over" effects of national fiscal policies in times of crisis, risks are shared in a significant extent. The Member States shall provide the Commission budget together with the macro-economic forecasts on which the plan is based on. An independent institution will oversee the fulfillment of common regulations. This regulation is considered to be a preventive tool of the Growth and Stability Pact, because if the Commission considers that the budget plan does not meet the provisions of the GSP, it may request review of the plan and provide recommendations that nation states must take into account. The second regulation concerns the strengthening of financial supervision under which the Commission can decide, if need, a stricter supervision of states considered financially vulnerable. Also, this regulation provides for stricter supervision States receiving precautionary financial assistance.

Treaty on Stability, Coordination and Governance in Economic and Monetary Union, known as the 'fiscal compact' came into force on 1 January 2013, and aims to strengthen fiscal discipline in the eurozone. This treaty is based on three main elements fiscal stability, coordination and governance in the EU economy euro area. With regard to fiscal stability, the requirements are similar to those of the GSP deficit below 0.5 % and debt below 60%. The main change is the method of punishment, which is simplified and temporary deviations are allowed only under special circumstances (eg financial crisis). To ensure compliance with these provisions will be a national supervisory authority, and in case of deviation, it may refer to the European Court of Justice, having the right to amend to 0.1% of GDP. The provisions relating to the coordination of EU economies require a partnership between the EU members, through which the exchange of information and discussion about the reforms to be implemented at national level. This news is extremely important because of experiences during the financial crisis of 2007-2008, when the Member States have implemented different provisions to tackle the crisis, but without analyzing their effect in Europe.

This pact is believed to be essential for completing economic and monetary union, and may be the necessary step to save the euro and at the same time strengthen its position in the global market.

We strongly believe that EMU will not be complete without fiscal integration, but at the same time, the question arises, how democratic is a fiscal integration without political base. At the moment the EU is trying to establish some common fiscal rules for the eurozone and a common tool for crisis resolution.

Conclusions

The euro proves to be an instrument of full economic integration of the community space and also an accelerator of the political one. The importance of the euro is also relevant for other regions, the currency having received an international position along with the dollar.

Among the future challenges for the euro we can list the implementation of macroeconomic policy at the EU level, review of the Stability and Growth Pact, the EMU economic governance effectiveness, competitiveness and flexibility of the European economic and social model. (33)

The Eurobarometer shows that the euro has become a symbol for EU citizens. (34) After its effective introduction in 2002, the euro began to be perceived as part of the European identity. Thus, in a study by Eurobarometer on EU citizens regarding the meaning of the EU for the citizens, the first place was represented by the freedom of movement, with 50% of the respondents, followed by the euro, with 49% of the respondents. Relations within the EMU regarding economic growth are complex and varied. We can differentiate direct and indirect effects that overlap or influence each other. Since the period of time that was analysed covers only 10 years, and economic growth is a lengthy process, market research demonstrates only empirically the general phenomenon of economic growth. Some indicators, such as the decrease of transaction costs, have a positive effect measured at 0.3 to 0.5% of the GDP. Then, eliminating the exchange rate risk encourages investment and economic growth. In 1997 studies forecasted an economic growth of up to 3% in the euro area in the first 5 years. The EMU has been shown to contribute to a real budget discipline in the member states. Through institutional reforms such as the SGP, member states entering the EU adopt financial policies aimed towards fulfiling the ECB mandate of financial stability and social systems reform.

Financial market integration is carried out on the money market or in the process of harmonisation on the government bonds market. (35) The EMU has allowed the creation of this large financial market in participating countries. These issues are particularly relevant for financing companies on the financial market.

The future role of the euro--as we have stated in this chapter depends on its function as an anchor, reserve and intervention currency. Also defining is the process of integrating financial markets in the EMU and expanding the euro influence by EMU enlargement with new members, notably Great Britain. Denmark could join the euro area after experiencing the economic and financial crisis.

The international role of the euro also depends on the evolution of economic performances in the eurozone compared with the US. The eurozone has to increase its economic growth rates by increasing structural flexibility, according to the Lisbon Agenda. The perception regarding a possible devaluation of the dollar in relation to the euro may favour an increased international role of the euro.

The ECB mandate explicitly guarantees the internal stability of the single currency and in this sense, it has established a positive development in ensuring price stability. The ECB will continue its policy to refrain, to encourage or to inhibit the direct use of the euro outside the eurozone. Thus, market forces will decide the international role of the euro.

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9. Elliot, D.J. (2012), "Key Issues on European Banking Union", in Global Economy and Development

10. Fishman, R., A. Messina (2006), The Year of the Euro, The cultural, social and political import of Europes's common policy, University of Notre Dame Press

11. Institut der deutschen Wirtschaft (2008), Zehn Jahre Euro, Erfahrungen, Erfolge und Herausforderungen, Koln: Deutscher Instituts-Verlag

12. Freivalds, John (2006), "Is the dollar's exorbitant privilege as the global standard at risk?," World Trade Magazine, [http://www.worldtrademag.com/Articles/Column/BNP_GUID_9-52006_A_10000000000000497000], 23 April 2010

13. Gulde, Anne Marie (Hrsg.) (2008), The CFA Franc Zone, International Monetary Fund

14. Issing, Ottmar (2008), The Birth of the Euro, Cambridge University Press

15. IMF (2008), Regional Economic Outlook, International Monetary Fund, [http://www.imf.org/external/Pubs/FT/REO/2008/EUR/ENG/ereo0408. pdf] 10 June 2010

16. Liebscher, K. (Ed.), (2006), Financial Development, Integration and Stability, Evidence from Central, Eastern and South Eastern Europe, Edward Elgar Publishing Limited

17. B.M., Markiewicz, A., Jonung, L., (2011) "A fiscal union for the euro: Some lessons from history", NBER Working Paper , No. 17380

18. Muckl, Wolfgang (Ed.), (2000) Die Europdische W'dhrungsunion, Paderborn: Ferdinand Schoeningh

19. R. Mundell, & P.J. Zak, (2005) International Monetary Politics after the Euro Cheltenham:Mass Edward Elgar Publishing, Inc., p. 24, [http://www.netlibrary.com/Reader/] 15 June 2010

20. Portes, Richard (2002), "The role of the euro in the world: past developments and future perspectives", London Bussiness School, [http://www.europarl.europa.eu/comparl/econ/pdf/emu/speeches/20001123/ portes/default_en.pdf], 20 April 2010

21. Roy, J., P. Gomis-Porqueras (2007), The Euro and the Dollar in a Globalized Economy, Ashgate Publishing Limited

22. Sumual, D. (2003), "Is it the end of US Dollar Supremacy?", The Jakarta Post, October 2003, [http://www.thejakartapost.com/news/2003/10/23/it-end-us-dollarsupremacy.html.], 10 March 2010

23. Tesmer, Hans Joachim (2001), The Euro under American attack? The development of the Euro since its January 1999 Debut, Hamburg: Mauke Verlag

24. Townsend, Mark (2007), The Euro and Economic and Monetary Union, John Harper Publishing

25. van Hagen, Jurgen (Hrsg.), (1995) Monetary and Fiscal Policy in an Integrated Europe, Berlin: Springer Verlag

26. Williamson, John (2004), "The dollar euro exchange rate", Economie Internationale, nr. 100, 2004/4, [http://www.cairn.info/revue-economieinternationale], 21 September 2010

27. de Beaufouert Wijnolds, J. Onno (2006), "Living up to expectations? Taking stock of the international role of the euro", Conference Paper, University of Miami, Washington, [http://www6.miami.edu/eucenter/ conf/Wijnolds_euro06final.pdf], 10 June 2010.

Dragos Paun *

* Dragos Paun, PhD is assistant professor and teaches public finance and international taxation at Babes-Bolyai University, Faculty of Business. Contact: dragospaun.tbs@gmail.com

(1) K. Liebscher (Ed.), Financial Development, Integration and Stability, Evidence from Central, Eastern and South Eastern Europe, Edward Elgar Publishing Limited, 2006, p. 56

(2) M.S. Allam, A. Goerres, Adopting the Euro in Post-Communist Countries, An Analysis of the Attitudes toward the Single Currency, Koln: Max-Planck Institut fur Gesellschaftsforschung, 2008, p. 6

(3) J. Roy & P. Gomis-Porqueras, The Euro and the Dollar in a Globalized Economy, Ashgate Publishing Limited, 2007, p. 152

(4) Margarida Duarte, "The Euro and Inflation Divergence in Europe," in Federal Reserve Bank of Richmond, Economic Quarterly Journal, 2003, p. 54 [http://www.richmondfed.org/publications/research/economic_quarterly/2003/summer/pdf/ duartesummer03.pdf.], 15 March 2010.

(5) Willem Buiter, The Inflation Criterion for Eurozone Membership: What to do when you fail to meet it?, European Institute, London School of Economics, 2006, p. 3, [http://www.nber.org/~wbuiter/crash.pdf], 10 March 2010.

(6) J. Roy & P. Gomis-Porqueras, op.cit., p. 158.

(7) Ottmar Issing, The Birth of the Euro, Cambridge University Press, 2008, p. 177.

(8) Wolfgang Muckl (Ed.), Die Europaische Wdhrungsunion, Paderborn: Ferdinand Schoeningh, 2000, p. 84.

(9) J. Roy & P. Gomis-Porqueras, op.cit., p. 59

(10) Richard Portes, "The role of the euro in the world: past developments and future perspectives", in London Bussiness School, [http://www.europarl.europa.eu/comparl/econ/pdf/emu/speeches/20001123/portes/default_en.pdf], 20 April 2010

(11) John Freivalds, "Is the dollar's exorbitant privilege as the global standard at risk?," in World Trade Magazine, [http://www.worldtrademag.com/Articles/Column/BNP_GUID_9-5-2006_A_10000000000000497000], 23 April 2010.

(12) R. Mundell, & P.J. Zak, International Monetary Politics after the Euro, Cheltenham: Mass Edward Elgar Publishing, Inc., 2005, p. 24, [http://www.netlibrary.com/Reader/], 15 June 2010.

(13) https://www.ecb.int/pub/pdf/other/euro-international-role201207en.pdf, 01 June 2013.

(14) M. Baimbridge, & P. Whyman, Economic and Monetary Union in Europe, Theory Evidence and Practice, Edward Elgar Publishing, 2003, p. 133.

(15) Anne Marie Gulde (Hrsg.), The CFA Franc Zone, International Monetary Fund, 2008, p. 6.

(16) J. Roy & P. Gomis-Porqueras, op.cit, p. 78

(17) Jurgen van Hagen (Hrsg.), Monetary and Fiscal Policy in an Integrated Europe, Berlin: Springer Verlag, 1995, p. 202

(18) J. Roy & P. Gomis-Porqueras, op.cit., p. 63

(19) Onno de Beaufouert Wijnolds, "Living up to expectations? Taking stock of the international role of the euro", Conference Paper, University of Miami, Washington, 2006, p. 6, [http://www6.miami.edu/eucenter/conf/Wijnolds_euro06final.pdf], 10 June 2010.

(20) Ottmar Issing, op.cit., p. 177

(21) IMF, Regional Economic Outlook, International Monetary Fund, 2008 [http://www.imf.org/external/Pubs/FT/REO/2008/EUR/ENG/ereo0408.pdf], 10 June 2010

(22) J. Roy & P. Gomis-Porqueras, op.cit., p. 65

(23) EC, Introduction of the euro in Slovakia. Analytical report, 2009 [http://ec.europa.eu/public_opinion/flash/fl_214_en.pdf], 10 September 2010

(24) John Williamson, "The dollar euro exchange rate", Economie Internationale, nr. 100, 4/2004, pp. 5160, [http://www.cairn.info/revue-economie-internationale-2004-4-page-51.htm], 21 September 2010

(25) Hans Joachim Tesmer, The Euro under American attack? The development of the Euro since its January 1999 Debut, Hamburg: Mauke Verlag, 2001, p. 42

(26) D. Sumual, "Is it the end of US Dollar Supremacy?", The Jakarta Post, October 2003, [http://www.thejakartapost.com/news/2003/10/23/it-end-us-dollar-supremacy.html.], 10 March 2010

(27) D. J. Elliot, "Key Issues on European Banking Union", in Global Economy and Development, November 2012, p. 10.

(28) Banca Centrala Europeana, Stabilirea Mecanismului de Supraveghere Unic, primul pilon al Uniunii bancare, [http://www.ecb.int], 10 April 2013

(29) D. J. Elliot, "Key Issues on European Banking Union", in Global Economy and Development, 2012, p. 20

(30) B. M., Markiewicz, A., Jonung, L., "A fiscal union for the euro: Some lessons from history", in NBER Working Paper, No. 17380, 2011, p. 3.

(31) Comisia Europeana, Proiect pentru o uniune economica si monetara profunda si veritabila, Lansarea unei dezbateri la nivel european, 28 noiembrie 2012, p. 7, [http://ec.europa.eu,] 10 May 2013

(32) Ibidem, p. 8.

(33) Mark Townsend, The Euro and Economic and Monetary Union, John Harper Publishing, 2007, p. 267

(34) R. Fishman, A. Messina, The Year of the Euro, The cultural, social and political import of Europe's common policy, University of Notre Dame Press, 2006, p. 69

(35) K. Liebscher, (Ed.), Financial Development, Integration and Stability, Evidence from Central, Eastern and South Eastern Europe, Edward Elgar Publishing Limited, UK, 2006, p. 436

Table 1. International reserves

percentage               Dec.   Dec.   Mar.   Jun.   Sept.  Dec.
                         2005   2006   2007   2007   2007   2007

global           USD     66.9   65.5   65.0   65.0   63.8   63.9
                 EUR     24.1   25.1   25.4   25.5   26.4   26.5
                 JPY     3.6    3.1    3.0    2.8    2.7    2.9
                 GBP     3.6    4.4    4.5    4.6    4.7    4.7
                 other   1.9    2.0    2.1    2.1    2.3    2.0
industrialised   USD     73.0   71.3   71.4   71.2   69.6   69.4
  countries
                 EUR     19.6   21.0   21.1   21.2   22.5   23.1
                 JPY     3.4    3.5    3.2    3.1    3.1    3.1
                 GBP     2.2    2.6    2.6    2.8    3.0    2.8
                 other   1.8    1.6    1.6    1.7    1.9    1.6
developing       USD     61.7   61.2   60.5   61.0   60.2   60.7
  countries
                 EUR     27.8   28.1   28.4   28.2   28.9   28.4
                 JPY     3.7    2.8    2.8    2.6    2.5    2.8
                 GBP     4.8    5.7    5.8    5.8    5.9    5.8
                 other   1.9    2.2    2.5    2.4    2.6    2.2

(Source: ECB 2008:47)

Table 2. Importance of the euro in the international financial system

International debt titles (generic definition), in billion USD

                 1995

all currencies                      EUR        USD

2.846,8                             777.7      1.104,1

in percentages, all currencies      27.3       38.8

                 2007

22.713,5                            11.008,5   7.921,8

in percentages, all currencies      48.5

            all bonds, in billion USD

                 1995

all currencies                      EUR        USD

international    2.846,8            777.7      1.1 HI

national         24.825,1           6.319,3    10.510,4

Total            27.671,9           7.097,1    H. 614,5

total in percentages, all           25.6       42.0
currencies

                 2007

international    22.713,5           11.008,5   7.921,8

national         57.173,0           12.735,3   24.429,0

Total            79.886,5           23.743,8   32.350,8

total in percentages, all           29.7       40.5
currencies

(Source: IdW2008:80)

Figure 3. Euro share in global reserves by region (percentage)

                 Q4     Q4     Q4     Q4     Q4     Q4     Q4
                 1999   2000   2001   2002   2003   2004   2005

eurozone         48.1   50.4   54.9   58.3   58.2   57.8   57.4
  neighbouring
  regions
dollar area      13.5   13.7   14     17.8   18.4   18.3   17.7
all reporting    17.9   18.4   19.3   23.9   25.3   25     24.4
  countries

Note: Table made from bar graph.

(Source: ECB 2008:63)