euro, the region ’ s ) equilibrium real exchange rate and real interest rate. but looking at exactly the same phenomenon in another way, those who seek international currency status should not forget that an appreciating currency — and one that is very often a safe haven in times of economic and political crisis — implies a reduction in competitiveness and a drag on economic growth through a declining current account balance. as the international role of the euro increases, the demand for euros will increase — both directly as currency and indirectly via euro - denominated assets — potentially leading to an appreciation of the euro. i say potentially because we all know that the price of anything, including the euro, is affected by supply as well as demand. and the euro will encourage an increase in both the issuance of eurodenominated liabilities as well as in the demand for euro - denominated assets. as a result, there is some uncertainty about the effect of portfolio decisions on the price of the euro. even if the euro appreciates, this consideration suggests, the magnitude of the appreciation may not be very large. but let us nevertheless explore the implications of a net increase in the demand for euros and hence an appreciation of the euro over time, given that this is the result many have emphasized and one with particularly important implications for the international financial system. the effect of a large reallocation of portfolios away from the dollar and dollar - denominated assets and into the euro and euro - denominated assets would, by definition, imply a swing from current account surplus to deficit for the euro area as investors acquire net claims on the region. indeed, the appreciation of the euro would be the cause of the euro - area ’ s move from surplus to deficit. but such an appreciation of the euro would bring a reduction in competitiveness that could provide additional pressure for structural reform in continental european product and labor markets. and the counterpart to this from our side would be a reduction in net claims on the united states, and might be just the medicine the doctor ordered to help us move to a more sustainable external position. i ’ d like to say a few words about how monetary policymakers think about the exchange rate when judging the appropriate level for domestic short - term interest rates. as you know, the american economy is relatively closed when compared with individual european countries — u. s. exports of goods and services, for example, are only 14 percent of our gdp, compared with germany where exports are 31 percent

will use the dollar simply because you and everyone i do business with uses the dollar — that is, there is a network externality associated with using the dollar. but the international financial consequences of the euro will be driven most importantly to the extent euro - denominated assets play a growing role in global portfolios, displacing to some degree the role of dollar - denominated assets. such an expanded role for euro - denominated assets would depend upon and follow from the development of a broad, liquid euro securities market to rival the dollar securities markets. but i am talking only of potential. a growing and ultimately significant international role for the euro is not automatic. instead, the euro area will have to earn its place in the international financial system, and earn it the old fashioned way — by pursuing policies that produce a healthy euro - area economy. by improving price discovery within the euro zone, the euro itself may increase competitiveness across europe, and thereby benefit low - cost producers, trade competitiveness, and european consumers. but the key to the success of the euro area would still appear to be the same set of policies that would have been essential in france, germany, and other euro countries in the absence of the euro : structural reforms, especially those related to reducing the rigidities in european labor markets, and disciplined monetary and fiscal policies. does the euro make structural reforms and disciplined policy more or less likely? frankly, i do not know the answer to that question. fortunately, we do not live in a zero sum world. the structural reforms and monetary and fiscal policies that would make the euro area stronger and more competitive would certainly enhance the strength of the world economy as well. whenever the world economy is strengthened, the u. s. benefits. however, this should not lead us to understate or neglect the significant changes in trade flows, current account balances, and exchange rates that might be part of the transition to an increased international role of the euro, and the importance of careful management of this transition. it is only fair, however, to warn my euro friends that having a preeminent international currency has its pluses and minuses — it is not an unmitigated free ride, as some of the discussion has suggested. there is a burden that accompanies having an international currency. policy changes that are undertaken for domestic purposes can have important effects on others, effects that are magnified when a country or region is not only a large part of