The Future Of The Euro As a Global Key Currency: First Place Or Second Fiddle?

Abstract

In a globalised world efficient international trade and investment require a respected and stable international key currency. The current key currency, the US dollar (hereafter dollar), faces serious predicaments because of its home country’s economic woes. This strengthens the likelihood of the euro assuming future primacy in the constellation of global key currencies. This paper assesses such likelihood by researching the requirements and determinants for the attainment of international key currency status and applying them to the euro. It is argued that any expectation about the euro becoming the dominant key currency in the foreseeable future is unrealistic. This is because the euro lacks a competitive financial and structural basis in comparison to the dollar, but even more so because the euro is deficient in its geostrategic and political support base in the global economy.

Notes

1 The EU or European Union consist of 27 countries and include many countries, e.g. the UK, Denmark, Sweden and others that do not use the euro as their currency. However, the European Monetary Union (EMU), also known as the euro area or euro zone (EZ), consists of a grouping of EU Countries and comprises 17 countries whose sole currency is the euro. They have the European Central Bank (ECB) as their policy-making central bank. (An exception is that Andorra, Kosovo, Montenegro, Monaco, San Marino, and the Vatican City are not EU members, yet use the euro as their currency).

2 Created by the European Council in 1978, the EMS introduced a system to limit exchange rate fluctuations to certain established margins for its member countries’ currencies. This was done in relation to the European Currency Unit (ECU), which in turn was based on a collection of various national currencies. The composition of this “basket” of currencies was determined in terms of objective criteria w.r.t to their relative economic importance in the EMS (Europedia, 2012).

3 This was due to historical reasons, but also to preserve the independence of their central banks and thus retain exchange rate adjustment as a policy tool during times of economic and financial disequilibrium. Some countries also have different institutional financial architecture and policy environments.