Impacts of EMU on non participant countries and their banks

         Attractiveness of the Europian currency to countries outside
           monetary union

   
    The euro, as the currency of an economic union at least as important as Japan the start issued by a central bank whose only policy objective will be to pursue internal monetary stability, will play an important monetary role outside of the union. The consequences of this will undoubtedly be felt in those countries on the doorsteps of the union and who, temporarily, are not part of it.
    The euro is destined to become an international reserve currency challenging, in due course, the status of the dollar, which has gradually lost ground over the last twenty years, mainly to the benefit of the yen and mark. The advent of monetary union in Europe will probably accelerate this trend as the central banks of member states will no longer intervene in dollars to support their own currencies. Therefore the required US dollar reserves of the European central bank will be far smaller than the current European US dollar reserves. Moreover, other countries may see the need to switch part of their reserves from dollars to euros.
It can be expected that the development of the euro as an international reserve currency, up to the point that it could overtake the dollar, will be a relatively slow process for at least two reasons. Firstly past experience shows  that such a process is met with considerable inertia. For example, the pound sterling remained the leading international reserve currency for some time after the rise of the United States as the leading industrialised nation and the loss of London's status as the leading financial centre of the world. "The dollar originally emerged as a major international currency at the end of World War I. The United States had for the first time become a net international creditor during the war, and the dollar was the only currency to remain convertible into gold at a fixed price into the 1920s. Its use in international trade and finance widened increasingly. The pound retained its dominant position as key currency in the inter-war period, in large part due to the inertia in such arrangements. As late as 1940, the level of foreign owned liquid sterling assets was still double the level of foreign owned liquid dollar assets. By 1945, however, the position of the dollar and pound, as measured by this statistic, had precisely reversed. World War II had completed the dollar's rise to ascendancy.
    The second reason likely to hold back the development of the euro as an international reserve currency, could be a certain reluctance on the part of the European Central Bank to see its currency play such a role, just as the Bundesbank and the Bank of Japan accepted, with much reticence, the development of the international role of their respective currencies. Of course, there are advantages in seeing one's own currency achieve such  international recognition. There is firstly the seigniorage that results from such a status, but also the convenience for residents to use their own currency in their international commercial and financial dealings, as well as the comparative advantage that this entails for the country's financial institutions.
    But there are also inconveniences. On the one hand, the progressive accumulation by non-residents of local currency assets as reserve assets, could lead to a rise in the value of the local currency, which  would be detrimental to local business. On the other hand, the growing use of the local currency abroad could bring about greater instability in its demand and make the task of the issuing authority in controlling money supply all the more difficult: Central banks are particularly concerned that internationalisation will make it more difficult to control the money stock. This problem need not arise if they do not intervene in the foreign exchange market; but the central bank may view letting fluctuations in demand for the currency be reflected in the exchange rate as being just as undesirable as letting them be reflected in the money supply. One can bring to mind the general principle that the greater the economic area and the greater the percentage of imports billed in the local currency, the smaller the impact of a change in the exchange rate on internal prices and costs.
    Whatever the development of the international status of the euro, it is certain that on a regional scale - in other words within the European Union and perhaps neighbouring countries - its monetary role will expand beyond the borders of the monetary union itself In particular, within countries of the second group (those momentarily outside of  the monetary union), the attractiveness of the euro will be felt in different ways.   
    First the euro will increasingly be used as an invoicing currency in commercial transactions between countries in the first group and countries in the second. Companies in the first group will most probably invoice sales of manufactured goods to companies in the second group in euros, in accordance with the accepted practice in international trade of billing manufactured goods in the local currency of the exporter.
    Companies in the second group, regardless of their respective local currencies, will probably grow accustomed to using the euro as an invoicing currency for a growing portion of exports of manufactured goods to countries of the first group and in doing so hedge at least part of their revenue against the depreciation risk of the local currency.
    For similar reasons the euro will see its role as an investment currency, in this second group, increase. The search for security will probably lead savers in this second group to acquire investments in euro and to subscribe to insurance policies denominated in euro. This last element could also apply to a number of borrowers opting to contract medium and long-term debt in euros, rather than in the local currency. In doing so they will avoid the risk of having to fund with a strong currency, the repayment of debt denominated in a potentially weaker currency bearing a higher rate of interest. If a member state of the second group was to borrow in euros, this would reinforce the credibility of their government’s commitment to work towards full membership of the monetary union and the convergence that this entails.