##preciation of the euro against all other currencies. the young currency and the young central bank needed to be tested in good and in bad times. the premature death of the euro was pre - announced several times. the sceptics had to concede. in my view, one element has to be taken into account in analysing the current situation, in the light of europe ’ s past experience. either a strong response is provided to the challenges posed by the current turmoil to the single financial market within the existing institutional framework, or the framework itself will be changed in favour of a more centralised system of supervision and crisis resolution. this is how the euro was born, after all, as it became clear, in particular after the 1992 - 93 foreign exchange crisis, that it was not sustainable to run different monetary policies within a single market. the same logic could apply in the case of financial regulation and supervision. and national authorities know it. references biais b., f. declerck, j. dow, r. portes, e - l von thadden ( 2006 ), “ european corporate bonds markets : transparency, liquidity, efficiency ”, cepr, may. cairncross a. and b. eichengreen ( 2003 ), sterling in decline : the devaluations of 1931, 1949 and 1967 ”, palgrave macmillan, 2nd edition. chinn m. and j. a. frankel ( 2008 ), “ the euro may over the next 15 years surpass the dollar as leading international currency ”, nber working paper no. 13909, april. cohen b. j. ( 2007 ), “ enlargement and the international role of the euro ”, review of international political economy 14 : 5, 746 - 773, december. dunne p., m. moore, r. portes ( 2006 ), “ european government bonds markets : transparency, liquidity, efficiency ”, cepr, may. ec ( 2008 ), “ emu @ 10 : successes and challenges after 10 years of economic and monetary union ”, european commission, directorate - general for economic and financial affairs, european economy 2 / 2008. ecb ( 2003 ), “ review of the international role of the euro ”, european central bank, december. ecb ( 2007 ), “ review of the international role of the euro ”, european central bank, june. ecb ( 2008a ), “ the international role

. most studies focus either on the store of value function of currencies and their role in foreign exchange reserves [ see chinn and frankel, 2008, for a recent review ] or on the unit of account and means of payment functions, including the invoicing of international trade [ see kannan, 2007 ]. in the first case, users of an international currency are mainly concerned with its ability to maintain a stable purchasing power over time. in the second case, users care about transaction costs and the economies of scale that are obtained from tapping into a large network. in both cases, a number of political, institutional, financial and economic factors contribute to increasing the popularity of an international currency. i will review these factors with particular reference to the euro. economic and financial conditions let me start with the economic and financial conditions supporting the international role of currencies. the size of the economy and its foreign trade flows are crucial to promoting the international status of a currency. this is because there are scale economies and network externalities in using the currency that is also used by other agents in international transactions. the larger the economy and its trade flows, the more likely it is that smaller economies will adopt the currency of the larger trading partner. in this respect, the critical mass of the euro area, in economic terms, is large enough to exert gravitational attraction on the rest of the world. in 2007, the euro area accounted for about 16 % of world gdp, measured at purchasing power parity, and its external trade was equal to more than 18 % of world trade, at current exchange rates. in the invoicing of international trade, however, network externalities tend to generate only one “ winner ”. for several decades, the us dollar has served as a medium of exchange and unit of account for homogeneous goods traded in organised exchanges, such as commodities and oil. in this case, inertia is very important and it is very difficult to dislodge the incumbent currency, whose use is associated with low information and transaction costs. yet even in this case, it would be possible to switch to a parallel invoicing system, including the euro, if agents expected others to start using the new currency and technological progress diminished transaction and information costs [ mileva and sigfried, 2007 ]. transaction costs are important not only in international trade but also in the use of currencies as financing or investment instruments. for this reason, truly international currencies must be backed