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."
Way premature. If they European countries don't start dropping like flies.
Will France be able to resist printing Euros if their
economy tanks?
Will the EU controls on inflation be able to prevent it?
Film at 11 (2011).
Gosh....one more thing to lay awake at night worrying about.
A few things to consider when pondering this article.
1. Article is from "Reuterville", and where exactly is there HQ now?
2. The authors are from "Harvard" and "University of Wisconsin" two socially and governmentally liberal institutions whose faculty are well known Europhiles. (Meaning they would love to see the dollar fall.)
3. The Euro has been around a while now...long enough for people to realize that the only thing backing the currency is...well the paper it's printed on, and the Eurozone's requirement of it's use...it's not backed by any considerable "economic" force.
This is just wishful thinking on the part of those whose agenda would have all of us beleive the Europeans have the best way of life...simply not true.
They've said this before and we haven't seen it. The U.N. is a failure, the European Union failed, it's currency will fail too. Reason? Confederacies don't work.
The author presents the Chinese action as a reaction against the dollar (and at least implicitly for the euro). But as freepers know, the US has been cajoling the Chinese to depeg for quite awhile now. So suggesting that this Chinese move is a reflection of the dollar's weakness doesn't seem accurate.
This is said mainly for internal purposes by politicians doomed to miss reelection given their mismanagement of the economy (Berlusconi). Those who count (bankers,industrialists) know it's the jokes of politics and don't spare a thought to consider the eventuality.
U can see the author's agenda clearly, as they brush aside any sluggishness or issues with the Euro with reckless abandon. (Meaning they're apologists for the currency's performance as oppose to looking at the facts and circumstances regarding its current valuation trend.)
And they are critical of US economic performance using sophistry to fulfill their aims as well. (Meaning their poor interpertation of how US GDP is factor for dollar valuations...they'll skew the facts till they think they have a point.)
While debt is an issue, they choose not to point out Yr to Yr GDP growth for the US economy (which is a constant) when compared to Europe's stagnation...and high unemployment, which sadly for them is a constant as well.
Nut jobs with a collegiate job and a liberal agenda published in Rueters...SOSDD.
I like what Ronald Reagan said, "We should make the dollar sound, respected again, not have it yo-yo in value as it has been for the last few years. The dollar should be worth a dollar today; it should be worth a dollar tomorrow."
Germany is economically and demographically dying .The Germans are demoralized like they were in 1920 .France is becoming islamic faster than they realize. Holland is on its way to become islamic . Italy has no growth and will likely leave the Euro Zone if recession persists .Spain was the net recipient of billions in subsidies from the EU and will go into economic decline when they end next year.the Euro is a currency without a state and with no future .The Brits would more likely become Germans than give up the pound ... The Euro is a socialist dream like the European Superstate .It will have the same end
very good points. Reuters is a leftist anti-US outfit. The only way the Euro will supplant the $ is if govt spending here gets out of control (opps may be happening) and the Feds start inflating the currency big time. The only thing saving us, is that Europe is about 20 years further down the road of Socialism.
Just for sake of realism I publish this smart map from Forbes
This a world map where countries are resized according how many cos' they have among the world 2000 biggest (according Forbes)
Let's think about some ways to do that:
#1) total up all of our foreign aid, humanitarian aid, food aid, relief aid, emergency aid, development aid, and on and on and on and present the bill to the EU and let them take over those payments.
#2) Let's close all military bases in the EU and Asia and bring those troops back home to support the US economy with their paychecks and the military procurement.
#3) Let's stop shoveling tens of billions into africa's bottomless money pit.
#4) Let's withdraw from the UN, UNESCO, UNICEF, WHO etc., and let the EURO'S take over that cash cow(??)
#5) Let's withdraw from WTO, GATT, NAFTA, CAFTA, World Bank, IMF and all these other parasitical agencies on the American Economy.
#6) Let's institute a tarrif system that ensures that American products are not locked out of overseas markets due to unreasonable tarrifs.
#7) Let's PENALIZE companies that send jobs that were once held by American's overseas to save a few bucks.
#8) Let's crack down HEAVILY on foreigners who priate American products, software, CD's, and the like that drain the American economy.
Let's let the EU take over all of these parasitical, wealth-draining processes. We can funnel all of that money to the American debt and reduce it remarkably in the next 5-10 years.
Problem solved.
If you think the world is going to give up the Dollar as the reserve currency in favor of the Euro, you're crazy.
The PEOPLE (not the Politicians) of Europe hate the Euro because they've been lied about it. The Dutch want their Gilder back. They were told that it would maximize their profits but instead, they're finding that their products cost half again as much as they did with the Gilder. Ditto the Lira (for whatever godforsaken reason). Ditto the Mark.
Why in the WORLD would Britain give up the Pound in order to join the Euro?????? So that France, Germany, Italy and the other moribund, DYING economies of Europe can parasitize the only stable "anglo-saxon based" economy left in Europe????
Yeah, right. Come back when you're sober!
You make it sound like owning conglomerates is a good thing. But the US has proved over the last 4-5 decades that the future doesn't belong to the conglomerate. It belongs to the small business.
Which provides more jobs for the US? Conglomerates or small business?
Yes, but the study was commissioned and published by the National Bureau of Economic Research, part of the Bush Administration.
But the problem is that that is grossly misleading. Italy, for example, has long had tax laws that discourage large corporations -- so whenever corporations get too big, they spin-off divisions. The United States does have larger corporations than other parts of the world, but that ignores the fact that vast amounts of economic activity take place regardless of the fortunes of very large corporations, and that smaller companies are often more nible than their larger competitors.
Besides I thank you for your opinion, I don't want to make any propaganda, just the devil's advocate.
Interesting in "socialist" Europe there's a remarkable concentration of billionaries
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