Posted on 08/05/2005 12:10:45 PM PDT by Jordi
WASHINGTON, Aug 5 (Reuters) - The euro could supplant the dollar as the world's dominant reserve currency within 20 years if Britain and other European Union countries adopted the unit and the greenback continues to slide, a recent study showed.
The paper, released by the National Bureau of Economic Research this week, outlined two key criteria for a change of the current status quo -- where about two thirds of world's central bank reserves are denominated in the U.S. currency.
First was the scope for expansion of the euro zone so that it tops the gross domestic product of the United States and envelops London's dominant international financial center.
Second is the role of U.S. economic policies and the risk that they might undermine confidence in the dollar through inflation and depreciation.
"We find that if all 13 EU members who are not currently in EMU (European Economic and Monetary Union) join it by 2020, including the United Kingdom, then the euro overtakes the dollar a few years later," the study's authors wrote.
"We also find that even if some of these countries do not join, a continuation of the recent depreciation trend of the dollar -- were it to occur for whatever reason -- could bring about the tipping point even sooner."
The study, written by Harvard University's Jeffrey Frankel and Menzie Chinn of the University of Wisconsin at Madison, said euro setbacks this year -- from sluggish growth and the rejection of the EU constitution -- were unlikely to delay for long the prospect of continued deficit-driven dollar losses in future.
"Our results suggest that such dollar depreciation would be no free lunch, and could have profound consequences for the functioning of the international monetary system," it said.
Debate resurfaced over the past year about the effects of rising U.S. international indebtedness on the dollar's prized reserve currency status, where the United States has a major advantage of borrowing from the rest of the world in its own currency.
The U.S. current account deficit has ballooned in recent years to about 6 percent of GDP and its outstanding stock of debts to the rest of the world has risen to 20 percent of GDP.
As world central bank reserves, particularly from Asia, have rocketed over the past three years as downward pressure on the dollar has mounted, speculation has grown that central banks may soon wish to diversify away from dollars.
Most economists reckon the euro is one of few sufficiently large and liquid alternative currencies.
The most recent data shows about 64 percent of the $3.81 trillion of world currency reserves are held in dollars and 20 percent in euros. But signs of diversification are mounting.
On July 21, China -- with the second biggest reserves hoard in the world at $711 billion -- changed its yuan target regime from a fixed dollar peg to one shadowing a basket of currencies.
On August 1, Russia -- with $114 billion of foreign currency reserves -- said it raised the share of euros in its day-to-day currency target basket to 35 percent from 30 percent and cut the dollar proportion to 65 percent from 70 percent.
There is also widespread speculation that Saudi Arabia -- with $112 billion of foreign reserves - may also change its strict dollar peg for a wider target basket.
The NBER study looked at several decades of reserve holding shifts, including the period when the dollar supplanted sterling as the dominant currency. It identified key determinants of these shifts and scenarios for the future.
"The euro gains overwhelming dominance in the instance where the UK joins the euro area and rapid (dollar) depreciation persists indefinitely," the study said.
"In this combination, the switchover occurs in 2020 and eventually the euro accounts for more than 80 percent of combined dollar and euro holdings."
Hmmm. I have maybe 2-3 drinks per YEAR.
I see a personal attack, but I don't see any rebuttal to any of the points I've mentioned.
But, actually, my apologies. My rant was directed more at the author of the "study" than at you personally.
Except that Italy is already calling the Euro a calamity for their economy. Greece as well.
There's definitely infighting.
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Not only that, France and German cannot even get their fiscal house to meet EU budgetary directives. They make too little and spend too much.
You all did notice the French said NON to the EU right????
The choose the wrong people IMHO.
Why is your opinion valuable? Have you read their other writings? Do you know these authors or are you just making assumptions about the quality of the Bush Administration's vetting process.
"Yes, but the study was commissioned and published by the National Bureau of Economic Research, part of the Bush Administration."
Ah NO it is a Liberal "think tank".
They are the Chicken little variety of think tanks, they come out with these sort of "the sky is falling, the sky is falling" reports about 2xs a month.
http://www.nber.org/info.html
HISTORY OF THE NBER
Founded in 1920, the National Bureau of Economic Research is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community
2)Same of above. No military abroad i.e. less political influence for the U.S. abroad.
3)....and face unrest in Nigeria,Angola ,Guinea and consequent disruption of ExxonMobil plants. Africa has become "interesting" since they found exploitable oil fields there.
4,5,6,7) So you support protectionism, isn't it? No trade, no export , no imports. At least oil and raw materials have to be imported (and since 2004 food too). Actually the U.S imports 1.5 trillion of goods and services a year: can all of them be home-made?
8)movie/music/sowtware industries account for some 5-10% of the economy, and face competition as well. Non piratable Microsoft OSs would be fastly replaced by piratable ones (i.e. Linux). As for music and movies its IMPOSSIBLE to protect them from piracy.
You gave the prescriprtion for suicide.
Why is your opinion valuable? Have you read their other writings? Do you know these authors or are you just making assumptions about the quality of the Bush Administration's vetting process
And again, this has nothing to do with the US Govt. It is a Liberal "think tank", not an arm of the Govt.
3)....and face unrest in Nigeria,Angola ,Guinea and consequent disruption of ExxonMobil plants. Africa has become "interesting" since they found exploitable oil fields there
Funny how you missed the fact that those are primarily European and Chinese supplier
I have read this writing, which is enough to derive an "opinion" on this topic, and who was choose to provide advice...so lighten up Francis.
I should have added some clarifications about oil industry.
Worldwide oil exploration, extraction ,transportation, refining, distribution is dominated by 8-9 Oil Majors of wich ExxonMobil is the biggest. Developments of oil fields in remote areas are usually made by joint ventures including local oil cos' (if there are) plus 2-3 majors. So while industrial nations tend to be supplied by the nearest oil producing areas, it has no implications about the nationality of the Majors doing the job.
I add another irritating ranking, of the world biggest publicy traded oil companies by market value, according Yahoo Finance:
1) ExxonMobil ((U.S.) 372.5 B
2) British Petroleum (Britain) 244.1 B
3) Petrochina (China) 154.6 B
4) Total (France) 152.0 B
5) Royal Dutch (Netherlands) 131.5 B
6) Chevron (U.S.) 126.8 B
7) Eni (Italy) 109.3 B
8) ConocoPhillips (U.S.) 89.4 b
Aggregate data:
1) Europe 636.9
2) U.S. 588.7 B
3) China 154.6 B
“Two of the strongest economies in Europe are the UK and Sweden.”
I read here on FR that Sweden has the same GDP (gross domestic product) as Arkansas. Arkansas is the fifth poorest state in the union. This isn’t saying too much for the Swedes.
“The euro could supplant the dollar as the world's dominant reserve currency within 20 years if Britain and other European Union countries adopted the unit and the greenback continues to slide, a recent study showed.”
Dream on. Only if we stood still and stopped growing.
Oh, by the way, I also read here on FR that if Califonia were a seperate country, it would be the 5th richest country in the world. That is what I read. I don't know if it is true with its socialist agenda.
But anyway, phooey with the above article. Consider the source.
This stagnation have nothing to do with the Euro. It would have happend anyway maybe it would have been worse. The common market makes it easier to trade between countries and saves company time and money. Where do you think the US would have been with 50 states with boarders and passport compare to the common market. My guess is that living standard would not have been at the same level
Even the socialist in Germany is giving huge tax cuts. There are major restructioning going on. It might take a year or two, but I am surtain that growth will pick up.
Socialism is bankrupting the countries of Western Europe. Now that the Constitution has been rejected, individual countries may start their printing presses again (France, Germany and others already have incurred deficits over the allowed level). This will drop the Euro's value compared to the dollar.
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