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Global Financing And Exchange Rate Mechanisms

999 words - 4 pages

The euro has been years in the making. Ever since the Treaty of Rome in 1957 (Europa, 2006) in which a common European market was declared as a European objective, Europe has been steadily moving towards a common currency. They had a common commercial policy with common external tariffs on imports but integration of economic policy was minimal. "The Treaty of Maastricht (1992) introduced new forms of co-operation between the member state governments." (Europa, 2006, para. 6) The Maastricht Treaty had created the European Union; this turned European market into a large economic power, acting in world trade as a single unit. From 1992, the single market became an economic and monetary union and introduced a single European currency, euro, which managed by a European Central Bank (Europa, 2006)The euro became official currency with eleven participating countries on January 1, 1999, (Antweiler, W., 2001) has simplified the way Europeans spend money. The disappearance of 11 sovereign currencies and the increased mergers and acquisition between Euro zone banks instigated by the introduction of the Euro has led to an increase volume in trade among the 11 countries. "With the euro in existence, trade among the 11 countries will not require the purchase or sale of foreign exchange. nor will contracts for transactions among the countries be subject to uncertainties regarding future exchange rate." (Global Economics, 1999)The elimination of exchange rate fluctuations within the euro area provides a more stable environment for trade by minimize risks and uncertainties for both international organizations that previously had to factor currency risks into their costs. Furthermore, organizations are better able to forecast their investment because of reduced uncertainties. Many transaction costs, such time and money, are also eliminated without the presence of exchange rate fluctuations. Costs resulting from managing several currency accounts, foreign exchange operations, hedging operations and cross-border payments in foreign currencies can be saved. In addition, companies and consumers are able to compare prices of goods and services more easily since they are expressed in the same currency. Companies, wholesalers, and consumers, would buy more from the cheapest source, thus putting pressure on organizations that try to charge at a higher price. This will foster competition and lead to lower prices, which result in inflation rate decreased. "Euro area annual inflation was 1.7% in September 2006, down from 2.3% in August. A year earlier the rate was 2.6%. Monthly inflation was 0.0% in September 2006." (Euro-Indicators, 2006) Lastly, a monetary union means organizations can conduct business throughout with minimal chance of disruption, creating a more stable economic environment, which creates attractive opportunities for foreign investors.Since the introduction of the euro, cross-border trading in the EU has accelerated. (Global Economics, 1999) Without...

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