Wednesday, 30 July 2008

Will the Euro become the leading global currency?

Georgetown University associate professor Kathleen R. McNamara (photo + more) has published an article in the August 2008 issue of the scientific journal "Review of International Political Economy" (description) titled
"A rivalry in the making? The Euro and international monetary power".
In her article, McNamara concludes that the Euro will not yet become the leading international currency because it lacks "the necessary political power and social requirements".

So, how does McNamara come to this conclusion, and what are the "necessary political power and social requirements"?

Let's first see her definition of the key currency:
"I define key currency broadly, as the currency that dominates across a variety of functions: namely, the national money held most widely outside its own borders by both private actors and public authorities, used in the majority of cross border transactions around the world, and most frequently purchased in the form of various financial instruments such as bonds."
According to her figures, the global foreign exchange reserves in 2006 were 65.7% in US-Dollar (-5.2 since 1999) and 25.2% in Euros (+7.3 since 1999). Together with some more details on global currency use, McNamara comes to the following intermediary conclusion:
"In sum, the Euro is a fast developer, performing at a level far beyond its age; however, the US dollar still dominates across a range of currency indices. Should we assume that this will continue to be the case?"
The answer to that question is that the speed of change in a global social and economic system like the focus towards the Dollar is rather low. According to McNamara, the factors determining the pace of change in this specific case are:
  • The European Union is only slowly becoming a real foreign policy actor, and its institutional ability or political will to become the dominant international political power is still too low (especially in comparison with the US).

  • The international financial system is used to the Dollar while watching the development of the Euro with caution.

  • The financial market of the European Union with its varying national legislation and control mechanisms is not as integrated as the US market.

  • The European Union and the European Central Bank are not actively promoting the Euro to become the leading currency, while the US Treasury regards a strong Dollar as a national interest (although actual politics showed a weakening stand on this position).
All these points taken together lead to the conclusion that
"The Euro has many of the economic advantages that investors are likely to seek out in a key currency. A huge internal market, increasing financial integration, and generally sound fiscal profiles all point to the Euro rising to challenge the US dollar over the next decade. However, the political and social determinants of key currency status are not yet met in the EU case, giving a good deal of breathing room to the US dollar."
But, and this is the key argument of the text, many of the denominators for a possible change are socially and politically constructed. Thus:

A European Union politically willing and institutionally able could quickly become the leading financial power of world, replacing the Dollar with the Euro as global key currency.


Antal Dániel said...

Hey Julien, I have just posted about this almost a year ago. I think at last this is something I could easily agree with you. What could be a bold step forward? Maybe give up one of the seats in the UN Security Council, give it to say, India, and exchange the other one for a EU seat and behave like a global player.

Julien Frisch said...

I think a common European seat in the Security Council is rather the last step of the whole process.

We still have so much to do with our internal market and the effective (and efficient) organisation of our Common Foreign and Security Policy that getting a single SC seat is our smallest problem, especially as long as France and Great Britain remain on the common track.

And politically, I am not sure whether we are ready to handle our position as financial focus for the rest of the world. Maybe it is not too bad that the process is rather gradual.

morrisonbonpasse said...

The success of the euro has shown the world that monetary union is a solid foundation for monetary stability and the optimal monetary union will be a Global Monetary Union. Rather than focus on whether the euro, by itself, will replace the U.S. dollar, it is more likely to be the core of the Single Global Currency in such a monetary union.
The Single Global Currency Association promotes the implementation of a Single Global Currency, within a Global Monetary Union and managed by a Global Central bank, by the year 2024. With the successful use of the euro and other common currencies, more and more people and organizations and nations are seeing the advantages of monetary unions. Our website is at
The Association recently published the 2008 Edition of my book, The Single Global Currency - Common Cents for the World. A copy of the 2007 edition is available at the Munchen personal archive at and on the Association's website.
The goal of 2024 is only 16 years away. If one looks at the world before the 2002 distribution of the euro to the people of the EMU, you would have seen in 1986 a Europe with a Soviet Union, an East Germany and a Berlin Wall. At that time, most Europeans would have scoffed at the idea of a new monetary union.
The benefits of a Single Global Currency include:
- Zero transaction costs to exchange currencies. Presently, $3.2 trillion is traded every trading day and all this trading and its associated costs, approximately $400 billion annually, can be eliminated.
- The end of currency fluctuations and currency speculation.
- The end of "Balance of Payments", "Current Account" and "global imbalances" problems for currency areas. There will, of course, still be trade and wealth inequalities, and more visibly; but they will not be compounded by the problem of foreign exchange transactions and reserve requirements. There would be no need for countries to maintain international reserves of other currencies.
- Zero manipulation by countries of their currencies, and thus no more need to cajole and jawbone any particular country or currency area about the value of its currency.
- Zero risk of national and regional currency crises such as occurred in the 1990's in Mexico, Argentina, Malaysia, South Korea and Russia.
- Minimal inflation, assuming that the future global central bank sets and achieves a low inflation rate, just as the European Central Bank has done. It's not clear that a zero inflation rate can be secured, as that would bring an economy perilously close to deflation and a deflation spiral, but certainly a low rate of inflation would be better for the world than the current rates.
- Worldwide asset values will increase by about $36 trillion due to the elimination of currency risk. Such an increase in asset values will cause annual worldwide GDP to increase by about $9 trillion.
- With no currency risk, worldwide interest rates would be lower.
- With zero risk of currency failure and zero manipulation and minimal inflation, the Single Global Currency would satisfy the moral obligation that a stable currency should be considered as a fundamental human right, as is the right to own property. A Single Global Currency would be far more stable than the currencies presently used by billions of human beings
While all these benefits are expected upon the implementation of a Single Global Currency, considerable benefits will also come during the implementation processes which will see the reduction of national currencies as predicted and welcomed recently by Benn Steil in Foreign Affairs.
Of course, not all economists agree with the goal of a single global currency. For those who would label the single global currency utopian, we call their attention to the euro, which began as a plan only about 30 years ago. Who would have thought in the 1970's that Europe would not only adopt a common currency, but also that its member countries would discard their old currencies?
The single global currency might be an enlarged transformation of one of the current major currencies (dollar, euro, yen), perhaps with a new name such as "dey", "eartha", "geo","globo" or "worldo" or it might be a new currency with such a name. How we get to that point is, of course, a major challenge, but there are several possible routes. One is to continue the trend of creating and expanding regional monetary unions, and then combine those monetary unions into one. Another is for smaller countries to continue to "ize" their nations' legal tender, as in "dollarize" and "euroize", as has been done in El Salvador and Monaco. Compatible with all these and other routes is the need to convene an international monetary conference of nations, monetary unions and related organizations, and begin planning for the implementation of a single global currency.
Organizations such as the IMF and the Bank for International Settlements, and individual economists should begin to carefully research and write about the benefits claimed above for the Single Global Currency, and about the costs, too. When the vast benefits become better known, the people of the world will demand a Single Global Currency and ask why we have been burdened so long with the existing multicurrency system, which Nobel Laureate Robert Mundell describes as "absurd."

Julien Frisch said...

Thanks for the advertisement.

I do not think that we will get a global currency in a foreseeable future. The reason: Not even the Euro has been accepted by all EU countries (and I mean those that could have already joint the European Monetary Union).

The power over their own currency is essential for many countries and the debates around the independence of the European Central Bank show that the question how to handle the currency and the monetary questions connected thereto are far from uncontroversial.

The world cannot even agree on much more simple things than a global currency - so I realistically seen your project is an illusion. (Yet, it is always nice to have some dreams!)