"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).
"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.