After the first decade of the advent of the euro, analysts have examined the prospect of the European common currency to become not only regional currency, but also its usage to spread internationally. Not only has the euro proved to be more than a powerful symbol of collective identity, but it has also provided price stability, it has been a shelter against currency crises and it has attracted new member states that wish to join the euro area. However, this positive landscape has changed in the face of the global financial crisis and the Greek budgetary crisis. Many have seen the euro only as ‘a fair weather currency’ arguing that confluence of factors facilitates the euro’s deficiency of becoming ‘bad weather currency’ such as economic divergence and internal imbalances between member states. The first section of the essay discusses the benefits and costs of issuing an international currency. By applying the three attributes of money to the euro, the second section reviews the euro’s performance as a medium of exchange, unit of account and store of value. The final section identifies factors which hinder the European common currency’s success as an international currency. These factors include: inertial forces characterising the financial markets, governance design of EMU, member states’ internal imbalances, fragmentation of financial markets, non-economic limitations and the European Union’s discouraging stance towards the euro’s international status.
Table of Contents
- 1. Introduction
- 1,2. Benefits and Costs of International Currency Status
- 1) Seignorage
- 2) Lower Transaction Costs
- 3) Liquidity premium for bond markets
- 4) 'Exorbitant privilege'
- 3. The international role of the euro: application of the three classic attributes of money
- 3.1. Store of Value
Objectives and Key Themes
This essay examines the potential of the euro to become a global reserve currency. It analyzes the benefits and costs associated with issuing an international currency, reviews the euro's performance as a medium of exchange, unit of account, and store of value, and identifies factors hindering its success as an international currency.
- Benefits and costs of international currency status
- The euro's performance as a medium of exchange, unit of account, and store of value
- Factors hindering the euro's success as an international currency
- Analysis of the euro's role as a reserve currency
- Comparison of the euro and the US dollar as reserve currencies
Chapter Summaries
1. Introduction: This introductory chapter sets the stage for the essay by examining the early prospects of the euro becoming a global currency and how those prospects have changed in light of the global financial crisis and the Greek debt crisis. It highlights the contrasting views on the euro's potential, ranging from a powerful symbol of unity to a currency vulnerable to economic divergence and internal imbalances within the Eurozone. The chapter outlines the essay's structure, previewing the discussion of the benefits and costs of an international currency, the euro's performance based on its three core functions as money, and finally, the factors limiting its global reach.
1,2. Benefits and Costs of International Currency Status: This section delves into the advantages and disadvantages of a currency achieving international status. The benefits explored include seigniorage (the difference between the face value and production cost of money), resulting in a transfer of resources from foreign holders of euros; reduced transaction costs due to lower exchange rate risks; increased liquidity in government bond markets from higher foreign demand; and the "exorbitant privilege," the ability to finance deficits by borrowing in one's own currency while earning higher returns on foreign investments. Conversely, the costs include increased fluctuations in currency demand, making monetary policy more challenging, and the "burden of responsibility" of considering global market impacts when implementing monetary policy. The chapter uses examples like the US dollar and estimations of seigniorage gains for the euro to illustrate these points.
3. The international role of the euro: application of the three classic attributes of money: This chapter analyzes the euro's international role through the lens of its three classic functions as money: medium of exchange, unit of account, and store of value. It emphasizes the interconnectedness of these functions. The chapter's focus on the "store of value" function is particularly detailed, examining its use as a reserve currency by central banks, its role in international borrowing by firms and governments, and its private use as a parallel currency through currency and asset substitution. Data on the euro's growing share of global foreign exchange reserves, compared to the US dollar, is presented and analyzed, hinting at a potential shift in reserve currency preferences.
Keywords
Euro, global reserve currency, international currency, seigniorage, transaction costs, liquidity premium, exorbitant privilege, monetary policy, exchange rate, foreign exchange reserves, reserve currency, currency substitution, asset substitution, economic divergence, internal imbalances, EMU governance.
Frequently Asked Questions: A Comprehensive Language Preview
What is the main topic of this essay?
The essay examines the potential of the euro to become a global reserve currency. It analyzes the benefits and costs of this status, reviews the euro's performance as money (medium of exchange, unit of account, and store of value), and identifies factors hindering its success as an international currency. A key comparison is made between the euro and the US dollar in their roles as reserve currencies.
What are the benefits and costs of having an international currency?
Benefits include seigniorage (profit from issuing currency), lower transaction costs due to reduced exchange rate risk, increased liquidity in bond markets, and the "exorbitant privilege" (ability to borrow in one's own currency and earn higher returns on foreign investments). Costs include increased currency demand fluctuations, making monetary policy more challenging, and the "burden of responsibility" of considering global market impacts when making monetary policy decisions.
How does the essay assess the euro's performance as a currency?
The essay assesses the euro's performance based on its three classic functions as money: medium of exchange, unit of account, and store of value. Particular emphasis is placed on its role as a store of value, analyzing its use as a reserve currency by central banks, its role in international borrowing, and its use in currency and asset substitution. Data on the euro's growing share of global foreign exchange reserves is presented and analyzed.
What factors hinder the euro's success as an international currency?
The essay identifies several factors that hinder the euro's success as an international currency, although these are not explicitly listed. The introductory chapter hints at challenges posed by the global financial crisis and the Greek debt crisis, suggesting economic divergence and internal imbalances within the Eurozone as potential obstacles. The complexities of EMU governance are also mentioned as a relevant factor.
What is the structure of the essay?
The essay is structured as follows: an introduction outlining the topic and its significance; a section detailing the benefits and costs of international currency status; a chapter analyzing the euro's role through its three functions as money; and a concluding section (implied, not explicitly stated as a chapter) summarizing the findings and likely incorporating a comparison with the US dollar.
What are the key terms used in this essay?
Key terms include: Euro, global reserve currency, international currency, seigniorage, transaction costs, liquidity premium, exorbitant privilege, monetary policy, exchange rate, foreign exchange reserves, reserve currency, currency substitution, asset substitution, economic divergence, internal imbalances, and EMU governance.
What is the overall conclusion (implied) of the essay?
While not explicitly stated, the implied conclusion is an analysis of the euro’s potential to become a global reserve currency, weighing its strengths and weaknesses against those of the US dollar, considering the challenges and opportunities in the context of global economic dynamics and the internal stability of the Eurozone.
- Quote paper
- Veronika Minkova (Author), 2010, Can the euro ever be a global reserve currency?, Munich, GRIN Verlag, https://www.grin.com/document/179300
