International Financial System and Monetary Policy

Abstract

Since its inception, the euro has symbolized a gamble. The adoption of a unified currency by 12 independent nations in 2002 was an unparalleled endeavor. While smaller countries have previously adopted the currencies of larger ones, it has never occurred that large economies like Germany, France, and Italy have agreed upon a shared currency. Out of the four major European economies, only Great Britain opted not to adopt the "eurozone" and instead maintained its own currency. 16 nations had adopted the euro as of 2010. Historically, states have relied on their central banks to carry out monetary policy measures in order to achieve their policy objectives, such as controlling inflation and promoting employment. However, in order to engage in monetary policy activities, states must possess authority over their money supply. By relinquishing the German mark, the Italian lira, and 13 other European currencies, these nations transferred authority over their monetary policy to the European Central Bank (ECB). In this scenario, the European Central Bank (ECB) has taken over responsibility for the key variables of monetary policy from the central banks of the European countries.