The emergence and vigorous growth of Euro market

The emergence and vigorous growth of Euro market and their ability to create multiple deposite expansion without any apparent control mechanism have given rise to a number of concerns regarding their impact on international liquidity, on the ability of national monetary authorities to conduct and effective monetary policy and on the soundness of the international financial system. Among worries expressed are :

• The market facilitates short term speculative capital the so called hot money creating enormous difficulties for central banks in their intervention operations designed to stabilize exchange rates.
• National monetary authorities lose effective control over monetary policy since domestic residents can frustrate their efforts by borrowing or lending abroad. It is known that with fixed or managed exchange rates, prefect capital mobility makes monetary policy less effective. Euro markets contribute to increasing the degree of international capital mobility.
• The market is based on a tremendously large volume of inter bank lending. Further, euro banks are engaged in maturity transformation, borrowing short and lending long. In the absence of a lender of last resort a small crisis can easily turn into a major disaster in the financial markets.
• Euro banks create private international liquidity and in the absence of central coordinating authority they could create too much liquidity contributing to inflationary tendencies in the world economy.
• The market allow central banks of deficit countries to borrow for balance of payment purposes thus enabling them to put off needed adjustment measures.

Against these are to be set the obvious advantages of the markets such as more efficient allocation of capital worldwide, smoothing out the effects of sudden shifts in balance of payments imbalances the spate of financial innovations that have been created by the market which have vastly enhanced the ability of companies and governments to better manage their financial risks and so on.