Euromarket

The Euromarket refers to a range of financial markets trading in currencies and bonds. Although there are significant differences between these markets, their common feature is that they trade in products denominated in “national” currencies outside the jurisdiction of the relevant state. Euromarkets are geographically significant because they have altered and extended the meaning of economic space. This entry reviews the origins and evolution of the Euromarkets, their role in the global financial system, and their [Page 1031]implications for the practice and study of economic geography.

There is no precise date for the creation of the Euromarkets, but most commentators agree that they came into existence in 1957, when the Eurodollar market was created in London. The Eurodollar market emerged at this time because of a combination of the U.S. dollar's dominance as an international currency, the dynamics of the Cold War, and the strictly regulated nature of U.S. banks. The Marshall Plan had pumped large amounts of U.S. capital into Europe to fund reconstruction, Japan was occupied by U.S. forces and was also being rebuilt, U.S. military spending was rising rapidly, and international trade was growing. Despite this, the U.S. banking system was both bureaucratic and restrictive, placing limits on the profitability of U.S.-based reserves and on the liquidity and flexibility of European banks. Many European banks—particularly in London—wanted an alternative. Further pressure on the system came from Soviet bloc countries, particularly the USSR, with dollar reserves derived from oil production that they did not want to expose to sequestration by a hostile U.S. government.

The Eurodollar market resolved these various problems by allowing banks to use their dollar reserves to make loans to each other and to clear dollar balances entirely outside the U.S. banking system. Because of a peculiarity of English law whereby if money is not formally allocated to a particular legal jurisdiction it is effectively nowhere, the Eurodollar market created an unregulated and untaxed legal “space” within which U.S. currency could be freely traded. Although originally confined to European banks, as the Eurodollar market grew, it quickly attracted U.S. banks wanting to take advantage of the new market's ability to circumvent the Federal Reserve Board. Eurodollars were soon joined by many other Eurocurrencies and by the Eurobond market. The prefix “Euro” no longer refers either to Europe or to the currency euro but to any financial product denominated in any currency outside its formal jurisdiction.

Although it was probably not intended by those involved in its creation, the Euromarkets have fundamentally altered the economic geographies of the 20th and 21st centuries. The markets have grown exponentially, stimulated by the rise of the petrodollar in the 1970s and the deregulatory policies of many Western governments in the 1980s and 1990s. The Euromarkets are often cited as key drivers of the process of economic “globalization.” Estimates of the values of the markets vary because of their unregulated and volatile nature, but it has been calculated that as much as $3 trillion to $5 trillion circulates in the markets daily. The Euromarkets have become key components in the offshore economy, many Euromarket products and reserves being held by companies based in tax havens such as the Cayman Islands, Jersey, or Switzerland. The Euromarkets have also become highly automated, using complex market algorithms and information and communications technologies to reduce transaction times to milliseconds.

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