alan greenspan : the euro as an international currency remarks by mr alan greenspan, chairman of the board of governors of the us federal reserve system, before the euro 50 group roundtable, washington, 30 november 2001. * * * today i would like to address some of the basic considerations that confront the euro in its emergence as a key international currency. i know i follow a number of contributions on this and related subjects and trust my comments will not overlap too much with what has already been said. an international currency emerges because it is a solution to an economic problem. in a world of multiple currencies and multilateral trade, those engaged in cross - border transactions face a problem of coordinating purchases and sales of currencies. because a sale of a given currency to a customer is unlikely to be matched by a nearly simultaneous purchase of the same currency from another customer, foreign exchange traders must make their customers wait or must hold costly inventories of currencies. when the volume of transactions in a given currency is large, however, the waiting time between buy and sell orders for the currency will typically be shorter, and smaller stocks of the currency can be held. thus, there are efficiency gains to channeling international transactions through a single currency, passing demands and supplies for other currencies through trades involving a so - called vehicle. in addition, as more and more transactions work through the vehicle currency, the currency becomes increasingly acceptable in international transactions because bid - ask spreads narrow and liquidity increases. because the attractiveness of any vehicle currency grows as its liquidity increases, an international currency has a tendency to become a natural monopoly. if the underlying demand for one of two competing vehicle currencies falters for a reason not clearly perceived to be transitory, and its bid - ask spreads, accordingly, increase relative to its competition, demand will shift to that competitor. but that shift, in turn, will widen the bid - ask spread of the faltering competitor still more, inducing a further shift of transactions to the alternative currency. this process ends with the demise of the weaker currency as a competing vehicle and the stronger of the two becoming the sole surviving vehicle. however, even when an emerging international currency is displacing another, the transition can be drawn out, resulting in two vehicle currencies existing side by side for a protracted period. between the two world wars, for example, sterling and the dollar were both active as international currencies. this period

##ed to forecast exchange rates for more than half a century, i have understandably developed significant humility about my ability in this area, a sentiment that i suspect many in this room share. with that caveat in mind, i agree with those who have hypothesized that the evident strengthened demand for the dollar, relative to the euro, has reflected a market expectation that productivity growth in the united states is likely to be greater than that in continental europe in the years ahead. the steady flow of capital from europe to the united states in recent years is, presumably, the consequence of europeans finding many investments in the united states persistently more attractive than those at home. as i have argued in other forums, this outcome may well have resulted to an important degree from the particular legal structures and customs that govern labor relations in much of europe. for example, over the decades, europe has sought to protect its workers from some of the presumed harsher aspects of free - market competition. to discourage layoffs, discharging employees was made difficult and costly compared with doing so in the united states. by law and by custom, american employers have faced far fewer impediments in recent years to releasing employees. this difference is important in our new high - tech world because much, if not most, of the rate of return from the newer technologies results from cost reduction, which on a consolidated basis largely means the reduction of labor costs. consequently, legal restraints on the ability of firms to readily implement such cost reductions lower the prospective rates of return on the newer technologies and, thus, the incentives to apply them. as a result, even though these technologies are available to all, the intensity of their application has been more clearly evident in the united states and other countries with fewer impediments to implementation. as a dividend, the level of employment in the united states has turned out to be higher as firms find hiring less risky and, hence, are more willing to add employees to their rosters. the persistent strength of the dollar in the face of the united states ’ unsustainable current account deficit underscores this impressive propensity to accumulate dollar investments, relative to those denominated in euros. i assume previous speakers have addressed the as - yet - unfulfilled expectation of a substantial diversification of the large holdings of international portfolios of dollars. some analysts predicted, before its introduction in january 1999, that the euro would rapidly displace part of the dollar