The Great Debate: Euro vs Dollar

EURO vs. US DOLLAR INTRODUCTION

The Euro vs. Dollar debate is one of the most popular areas of discussion and debate in the field of International Economics. Economists argue over the case of Euro taking over US Dollar as the world currency. Robert Mundell, a leading economist, stated in 1998 that

“The introduction of the euro will represent the most dramatic change in the international monetary system since President Nixon took the dollar off gold in 1971 [and when] the era of flexible exchange rates began…the euro is likely to challenge the position of the dollar [and hence] this may be the most important event in the history of the international monetary system since the dollar took over from the pound the role of dominant currency in World War I”

The issue becomes particularly relevant with the fact that the foreign exchange reserves for USD has grown by 163% between 2002 and 2010 and the corresponding rise for Euro has been 211% (allocated reserves data from COFER, an IMF database). Moreover there has been news of countries offloading their huge dollar reserves to diversify their reserve portfolio. This clearly shows the sentiment of countries becoming skeptical about the stability of US dollar. On the other hand, Euro has become the second most used currency of the world in just about a decade. Though there have been doubts raised over the structural fundamentals of Euro following the prolonged depreciation between 1999 and 2004 against the US Dollar and more recently the Eurozone crisis, but still the recent Chinese, Japanese and Middle Eastern interest in buying national debt from Eurozone peripheral countries, and especially Eurobonds issued by the EFSF, is clear proof that the euro will continue to be seen as an alternative to the greenback in the foreseeable future.

THE STANDPOINT

An international currency can be defined as one that is used outside its home country. Reserve currency status is the main subject of this paper, but it is just one of...