In addition, capital might also flow in the opposite direction, as non-European firms and governments tap the euro-denominated capital market as an efficient source of funds, in the same way as European businesses and governments have chosen to borrow dollars in recent decades. While the potential benefits of a more integrated European capital market in the long run are apparent, a number of observers have suggested that the economics of EMU -- as well as its plain mechanics -- may have unwelcome consequences for the dollar and world trade. More specifically, some have argued, EMU may cause a short-run glut of dollars in the international capital markets, leading the dollar to depreciate and the euro to appreciate, with resulting undesirable effects on trade flows. The reason there could be a dollar glut, these observers maintain, is that EMU would eliminate the need for intra-European intervention, reduce the importance of exchange rate management, and allow national central banks to pool reserves for external intervention, thus generally reducing the European central banks’ need for dollar reserves. Moreover, if the euro were BIS Review 109/1997  -4-  to become an attractive reserve currency for non-European central banks, the dollar glut could become even more severe.
On the contrary, to the extent that the birth of the euro fosters deeper trade and financial markets globally and a more efficient international monetary system, all countries stand to benefit, particularly an active participant such as the United States. Let me be more specific. In my view, for the United States and the international monetary system, the implication of a growing international role for the euro over the foreseeable future will be most significant with respect to financial rather than trade transactions. It is quite true that the euro may quickly become the currency of choice in the invoicing of trade between companies in the European Union and their foreign counterparts. Companies in regions with strong links to the European Union, such as those in eastern and central Europe, North Africa, and the CFA French franc zone, may also choose to invoice trade in euros. BIS Review 109/1997  -2-  More generally, the euro may well expand its importance in world trade beyond the relative trade weight of the European Union countries, following a path similar to that taken by the U.S. dollar and -- before that -- by the pound sterling. Nevertheless, I would argue that the economic effects of these potential changes in invoicing practices are likely to be limited. Why do I say this? First, to a large extent, the re-denomination of a significant share of world trade into euros will mainly represent a shift in invoicing practices from the use of former European currencies to euros.