Implications of the introduction of the Euro for the Mediterranean countries

• Published in: Thunderbird international business review 2003-01, Vol.45 (1), p.31-49
• Main Authors: Colton, Nora, Neaime, Simon
• Format: Article
• Language: English
• Subjects: Bank reserves; Central banks; Cooperation; Currency; Euro; European Monetary Union; Eurozone; Foreign exchange rates; Free trade; Impact analysis; International trade; Liberalization; Monetary policy; Studies; Subsidies; Trade agreements; Treaties
• ISSN: 1096-4762; 1520-6874
• DOI: 10.1002/tie.10054

The Mediterranean peripheral countries cannot afford to be passive viewers of the fundamental changes that are taking place in Europe after the introduction of the Euro. The new developments pose formidable challenges and opportunities. It will be argued that no single group of developing countries will be more affected by these changes than the Mediterranean countries given their geographical proximity to the region and their long historical record of extensive and large economic interactions (trade, finance, and migration). This article examines the implications of the introduction of the single currency in Europe on Mediterranean central bank reserves and foreign external liabilities, trade and capital flow, and exchange rate policies. It is shown that since most Mediterranean trade is with the EU, Mediterranean central banks will be necessitated to hold major portions of their foreign exchange reserves in Euros. Also, a Mediterranean currency peg to the Euro, or to a basket of currencies where the Euro is allocated, will be important in reducing financial and trade transaction costs. It will also be hypothesized that Mediterranean foreign debts will eventually have to be converted to Euros. Finally, parallels between this region and the U.S–Caribbean region will be drawn to reinforce the argument that trade and capital dependence will eventually lead to a pegging of the Mediterranean currencies to the Euro. © 2003 Wiley Periodicals, Inc.