to ensure the stability of the euro exchange rate, the european central bank is likely to want to be perceived as ready and able to operate effectively in the dollar market, for which substantial dollar reserves may be required. in the short term, the response of non - european central banks to the introduction of the euro is also likely to be cautious. ultimately, the desired euro holdings of these central banks will largely depend on the decisions they make about their exchange rate regime. a number of countries - - including the central european countries that have applied for membership in the european union and other countries in africa - - may decide to peg their currency to the euro. yet these countries may well wait for the newly - formed european central bank to establish its policy record and clarify its operating procedures before they commit their currencies to a euro peg. indeed, history suggests that a currency ’ s role as an international reserve, means of exchange, and store of value is slowly gained and slowly lost - - as the examples of the dollar and pound sterling illustrate. the dollar, in particular, may have seemed on the way to losing much of its international prominence after the demise of the bretton woods system in 1973. after declining as a share of international reserves and a means for international transactions from 1974 to the mid - 1980s, however, the dollar ’ s relative use has not changed significantly during the past decade. indeed, as the u. s. economy has grown more efficient and internationally competitive in the past ten years, the dollar has retained its strong role in the international monetary system. in short, it seems safe to assume that significant changes in the international role of the dollar and the functioning of the international monetary system would occur only gradually, and surely in a manner that could be easily coped with, given the turnover in capital markets we observe today. but should a different international monetary system ultimately emerge in which other currencies, such as the euro, play an increasingly important role alongside the dollar, there would be benefits for the united states as well. such a development would, for example, impose greater market - led discipline on the united states and, in the process, help us address our chronic low - savings problem. there is another indirect - - although potentially more important - - way in which emu may affect u. s. business and policymaking. this implication of emu has to do with the contribution a currency union is likely to make to increasing the efficiency and flexibility of the economies that join it.

at least since the publication of the “ one market, one money ” study by the european commission in 1990, observers and analysts of emu have paid significant attention to the decline in transaction costs that can be achieved by unifying up to 15 different currencies, and to the resulting gains in efficiency for europe ’ s economies. the experience of the united states is useful in this respect. the fact that 50 states in the united states share a common currency - - and have done so for over 130 years - - provides the critical foundation for an integrated and efficient capital market that extends from maine to california and on to alaska and hawaii. in this market, capital flows smoothly from high - saving to high - investment areas, as required by changing business conditions, without any thought of exchange rate risk. a common u. s. currency, it is important to note, has many advantages beyond simply reducing transaction costs. it also simplifies choices for households and corporate management, enhances the efficiency with which financial institutions and the payments system function, and promotes competition across the whole productive spectrum. while a common currency in europe can be expected to lead to similar efficiency gains, the economies of the united states and europe differ in several important dimensions, so that a common currency is likely to work in substantially different ways in the two regions. the ways in which europe and the united states differ most have to do with the degree of integration of their labor markets and their fiscal systems. the united states enjoys a very mobile labor force - - across sectors and states - which allows job losses arising during sector - specific or state - specific recessions to be rapidly absorbed where jobs are growing faster. this contributes to aggregate unemployment being kept reasonably in check. this willingness of american workers to move themselves and their family is a cultural characteristic of our people, no doubt based in the history of the united states as a nation of immigrants. to complement its high degree of labor mobility, the united states also has in place a federal fiscal system that allows the federal government to channel large transfers from fast - growing regions to slow - growing regions. progressive income taxation, a high elasticity of corporate tax profits to changes in income, and an integrated federal budget are the main components of this system. in contrast to the united states, europe is characterized by a more segmented labor market and very limited integration of its national fiscal systems. both these characteristics limit the ability not only of europe ’ s private sector to shift resources in response to regional recessions