Analysis: Euro marks 10th anniversary amid challenges ahead

by Shang Jun

BRUSSELS, Dec. 31 (Chinese media) -- Ten years ago, Europe launched its common

currency -- the euro, opening a new chapter in economic integration.

It can be said that the single currency has done well in the past decade,

but it still faces new challenges ahead.

SHINING ATTRACTION

The euro came into being on Jan. 1, 1999 when 11 European countries decided

to dispense with the bilateral exchange rates of their currencies and instead

have a single monetary and exchange rate policy.

The single currency existed in the first two years only as "book money"

used in accounting and financial transactions before euro banknotes and coins

were introduced in 2002.

Nobel Prize winner Milton Friedman predicted at the time the currency was

doomed to failure, he has since been proved wrong.

Celebrating its 10th birthday, the euro family will usher in a new member

-- Slovakia. With 16 countries on board in the new year, the single currency

club, or the eurozone, has become the second largest economy in the world after

the United States, based on official estimates of 2008 global gross domestic

product (GDP) growth and purchasing power parity among various currencies.

The financial crisis in the latter half of 2008 has made the euro even more

attractive, although the crisis itself has plunged the eurozone into its

first-ever recession.

Without the euro, the current financial meltdown and economic woes could be

worse.

"The euro has become the symbol of EU identity and is protecting us against

the tremendous external shocks that we have had to cope with since the summer of

2007," Joaquin Almunia, EU Commissioner for Economic and Monetary Affairs, said.

Thanks to years of fiscal consolidation under the common framework of the

monetary union, the euro remains relatively strong despite the financial crisis.

The eurozone member states have so far escaped the foreign exchange turmoil

because of the single currency, and the recent oil price hikes had been

weathered, analysts said.

European countries like Denmark and Sweden which have long stayed out of

the eurozone, are now having a second thought about their decisions as they feel

the effects of the current financial crisis.

Even euro-skeptic Britain is rumored to be changing its position on

adoption of the currency.

CHALLENGING DOLLAR

With the expansion of the single currency club, the euro is gaining

strength to launch a challenge against the world's No. 1 currency -- the U.S.

dollar.

The eurozone, without Slovikia, currently has a combined population of 320

million and accounts for 16.4 percent of the GDP. That compares with the United

States with a population of about 302 million and a 21.6 percent share of the

global GDP.

Since its introduction, the euro has been the second most widely-held

international reserve currency after the U.S. dollar and it is expanding its

share at the expense of the U.S. dollar.

According to the International Monetary Fund (IMF), the euro represented

26.4 percent of the official foreign reserves by the end of 2007, up from 17.9

percent in 1999, while the U.S. dollar had declined from 70.9 percent to 62.9

percent in the same period.

Former U.S. Federal Reserve Chairman Alan Greenspan said in 2007 that the

euro could indeed replace the U.S. dollar as the world's primary reserve

currency.

It is "absolutely conceivable that the euro will replace the dollar as

reserve currency, or will be traded as an equally important reserve currency,"

he said.

Additionally, there has been suggestions that the weakness of the U.S.

dollar in the recent years might encourage more countries to increase their

reserves in euro at the expense of the dollar.

A poll recently released by the Financial Times showed that a large

majority of continental Europeans believe that the euro could overtake the

dollar in global importance in the next five years.

The financial crisis also provides an opportunity for the euro to contest

the U.S. dollar.

The European Union (EU) has been pushing for an overhaul of the global

financial system in order to prevent a recurrence of the current financial

crisis, this is also seen by analysts as a move to change the international

financial landscape dominated by the U.S. dollar.

Although the U.S. dollar continues to enjoy its status as the primary

foreign reserve currency, the euro will certainly play a major role in ending

the dollar's monetary hegemony and in the emergence of a new multi-polar system.