share of the currency, a portfolio shift away from the currency, for example, can lead to large capital outflows and / or large declines in the exchange rate. concerns about the effects of changes in portfolio preferences caused both the german and the japanese governments to take measures to restrict the international uses of the deutsche mark and yen, respectively, during the 1970s and early 1980s. concerns that the imbalances in the us economy, including the large current account deficit, could lead to a massive sell - off by foreigners of their holdings of us dollar balances have underpinned concerns of a possible hard landing for the us currency. the international role of the euro let me now turn to the specific focus of this session - the international role of the euro. it is important to note that the ecb has adopted a neutral stance concerning the internationalization of its currency, implying that it neither fosters nor hinders the process. it accepts the view that the international role of the euro is primarily determined by the decisions of market participants. how, then, does the euro stack up in terms of the conditions that determine an international currency? the first factor i mentioned that determines international currency use is a stable currency. the mandate of the ecb is to maintain the purchasing power of its currency. since its inception, therefore, the ecb has sought, and it has attained, stability of its currency. this stability is proof that the institution is performing well. yet, in the quest for stability, monetary policy cannot go it alone. it needs to be complimented by a consistent fiscal - policy stance. indeed, the academic literature has coined a name for the connection between monetary and fiscal policies, calling it “ fiscal dominance ”. the implication of this connection for the international role of the euro is that, to ensure the future stability of the euro, member states will need to adhere to the stability and growth pact. the second factor determining international currency - status is size. measured in terms of population, the euro area is one of the largest economies in the world, with more than 300 million inhabitants. by comparison, the populations of the united states and japan are about 270 million and 125 million, respectively. the euro area is the largest trading partner of the world economy, accounting for almost 20 % of world exports, compared with about 15 % for the united states and 9 % for japan. the gdp of the euro area is equivalent to some 16 % of world gdp, about 6 percentage points less than the share of

nicholas c garganas : international role of the euro address by mr nicholas c garganas, governor of the bank of greece, at the conference of the european commission “ europe, the mediterranean and the euro ”, athens, 4 february 2003. * * * introduction ladies and gentlemen it is a pleasure to participate in an event organised by the european commission. i would like to thank the commission for inviting me to address some of the basic considerations that confront the euro in its emergence as an international currency. let me begin by asking the question : “ how does a currency acquire the status of an international currency? ” this question is being asked more and more often as the euro takes on increasing importance in the global financial system. the interwar period was dominated by two currencies - the us dollar and the pound sterling - while the postwar world has been dominated by the us dollar. unlike the situation in national economies or monetary unions, where the currency used is determined by government decree, currencies are used internationally because of neither an act of parliament nor an act of god. rather the choice of currencies used for international transactions is mainly the result of invisible hand processes. currencies attain international status because they meet the various needs of foreign official institutions and foreign private parties more effectively than do other financial assets. what factors contribute to the use of a specific money as an international currency? why was the dutch guilder the dominant international currency in the 17th and 18th centuries, the british pound in the 19th and early 20th centuries, and the dollar since the end of the second world war? several factors are essential if a currency is to be used internationally. first and foremost, an international currency must be perceived as sound. to be acceptable, market participants must be willing to hold it as a store of value. this circumstance means that inflation in the country or monetary union issuing the currency must be low and stable relative to those of other currencies. inflation reduces the purchasing power of a currency, discouraging its use internationally. it also leads to exchange - rate depreciation and uncertainty. a necessary condition for the international use of a currency, therefore, is that a currency ’ s future value in terms of goods and services has to be perceived as predictable and stable. clearly, many currencies meet this test ; yet few emerge as international currencies. therefore, there must be - and there are - additional factors that help determine the internationalisation of a currency. one such factor