South-Western College Publishing - Economics  
Euro-Phoria
Subject Euro
Topic International Finance
Key Words Currency Union, Exchange Rates, Economic Growth
News Story

The euro, Europe's new currency, debuted January 4 on the world's financial markets. The much-awaited debut was flawless, and enthusiasm for the euro raised its value relative to other major currencies including the dollar. After its first day of trading, the euro, which opened at $1.17, climbed to $1.1806 by day's end. Euro-phoria extended to the stock markets of Germany, France, Italy and Spain with increases of 5 percent or more.

There was little evidence of change in daily life of European countries. Euros are only usable for electronic payments until 1 January 2002. Only then will banks be able to supply euro currency. However, customers are able to open a euro-denominated bank account and to make purchases and write checks in euros. Fewer than 1 percent of the customers of the largest German banks had opened euro-accounts, probably because for the average European, there is little need to have one. Few stores in Germany were even posting prices in euros.

The possibility of confusion and some glitches remains, because until 2002 transactions will take place in both the domestic currency and the euro. Banks and financial institutions will have to be able to make the conversion. Banks have said that they will refuse to process bank transfers if the customer forgets to specify which currency is being used on his or her check. This will surely anger many people.

The market for euros opened in Asia and Australia first and its price rose as Asian fund managers bought the euro as a hedge against the global economic crisis. Demand continued to rise with the opening of European financial markets.

(Updated February 1, 1999)

Questions
1. Is the euro now a "money"? What conditions must it satisfy in order to be a "money"?
2. What determines the value of the euro relative to the dollar?
3. As the euro increased in value from $1.17 at its opening to $1.18, what happened to the value of the dollar?
4. What are the implications for U.S. trade with Europe if the euro were to continue to rise?
Source Edmund L. Andrews, "Without a Hitch, the Euro Opens To Trading in World Marketplance", The New York Times, January 5, 1999.

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