i

Research
On
A Critical Analysis on Euro vs. Dollar

Course Title: European Affairs
Course no: 518


Submitted to:
A.S.M. Ali Ashraf
Associate Professor

Submitted By:
Tohura Moriom Misti
SK-881
M.S.S 2
nd
Semester


Dept of International Relations
University of Dhaka

Date of Submission: 19
th
October, 2014




ii
Contents

Acknowledgement iii

Chapter I:
1. Introduction. 04
2. Data Collection Method.. 05
3. Research Question... 05
4. Limitations of the Research. 05
Chapter II:
5. Theoretical Explanation .. 06
6. Literature Review ... 08
7. Conventional Wisdom. 10
8. Alternative Explanation10
Chapter III:
9. Emergence of Euro11
10. Current Status of Euro and Dollar.13
11. Potentials of Euro of Being a Dominant Currency16
Chapter IV:
12. Criticism. 20
13. Recommendation... 22
14. Conclusion.. 23


Bibliography.. 25





iii
Acknowledgement

To complete this research there are lots of people who helped me during the whole period. I feel
very grateful to them for their supportive and friendly nature.
At first I would like to give thanks to Almighty Allah who blessed me with knowledge and
strength to complete this research within due time. Then I would like to thanks to my parents who
always supported my decisions and actions. My warm and cordial thanks go to my course
teacher Dr. A. S. M. Ali Ashraf for his guidance and advice which was most important to
complete this research. He also taught us proper knowledge about research writing while
teaching Research Methodology. I also want to thank Dr. Tanzim Uddin who has a great
contribution to make me interested and well known about currency politics. Further I would like
to thank friends who gave their valuable time and shared their knowledge with me and also
supported with literatures and recommendations. Finally I want to thank my fellow classmates
who helped me with different information and knowledge during the research.











4
Chapter I
1. Introduction
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.
- Robert Mundell (1998)
As seen in the past 150 years the country with the dominant currency of the day was also the
leading state.
1
Money buys power and influence, especially for a country that issues a currency
everybody covets
2
. Today the dollar is by far possessing the greatest demand as a currency.
However, after nearly a century of domination in world monetary affairs, the dollar is about to
face stiff competition when the euro is created
3
. The Euro, the second reserve currency, will have
an important role to play in a multipolar currency order if the euro area draws the right lessons
from its almost fatal sovereign debt crisis
4
. Because a currency can only become the top
international currency if there is an active political commitment by the issuing authorities to
make it the leading currency
5
. The feasibility of the European Monetary Union (EMU) project in
the long term confirms that the Euro in its present state is structurally flawed
6
. In this research
the prime focus is on the present status of Euro as dominant currency in the world monetary
system. Further this research will explore the possibility of Euro to surpass the Dollar and
become the international currency. Finally it will examine whether it is a myth or reality that
Euro will eventually overthrow the Dollar or not.


1
Wheatley, A. 2013. The Power of Currencies and Currencies of Power, Routhledge, 2013
2
ibid
3
Portes, R. and Rey, H. (1998), The emergence of the euro as an international currency, London Business School
and CEPR; London School of Economics. Available at: http://faculty.london.edu/rportes/EParticle.pdf
4
Wheatley, A. (2013)
5
Iglesias, O, M. (2011), The Euro vs Dollar Debate: A Review (WP), Elcano Royal Institute, Madrid Spain
Informa Ltd Registered in England and Wales. Available at:
http://www.realinstitutoelcano.org/wps/wcm/connect/7dbc398045b3ad469983df5e7489e10f/WP5-2011_Otero-
Iglesias_+Euro_Dollar_Debate.pdf?MOD=AJPERES&CACHEID=7dbc398045b3ad469983df5e7489e10f
6
ibid


5
2. Data Collection:
This research has been prepared by using qualitative methodology since it can provide an in-
depth understanding about the issue. This is an individual research project for academic purpose. This
research is designed using qualitative method which includes both primary sources and secondary sources
of data. As it is an individual research paper this research is mostly relied on secondary sources of data.
Primary Source: Experts interview of Tanzim Uddin
7
to have an in depth understanding about euro
politics and future of Euro and the Dollar.
Secondary sources: Sources such as previously conducted researches, published reports,
articles, books, journals, internet resources etc. have been used for data collection.
3. Research Question:
This research is mainly focused on the following central questions-
i) What is Euros present status as a dominant currency?
ii) Will or should the euro surpass Dollar and become an international currency?
iii) Euro overthrowing Dollar is a Myth or Reality?
This research is designed and aimed at considering these three central questions to find out the
best suitable answer.
4. Limitations of the Study:
Every research projects have to go through some limitations and challenges more or less and this
research paper is not beyond that problem. Limitations and challenges faced during this research
are the followings:
i) There is some limitation of available reading materials regarding this issue that seldom
reflects the currency politics.
ii) Limitations of time were one of the crucial challenges for this research because if there were
sufficient time then a lot more has to enrich this research.
iii) This research is an individual research which is another important barrier faced during the
whole period.

7
Associate Professor, Dept. of International Relations, University of Dhaka.


6
Chapter II
5. Theoretical Explanation:
Before fitting EUs Euro politics into any IR theory, IR theorist need to look carefully at their
established theoretical toolkits
8
. The three major theories of IR such as realism, liberalism and
Marxism are basically built around the idea of states dominant units of analysis in the world
system
9
. But EU does not reflect the conditions of being a nation state rather it promotes the idea
of multilateralism which support a common currency for European integration. The EU is
something beyond the nation state but more than nation state because it comprises of common
interest of powerful countries. However the emergence of Euro can be explained through
economic multilateralism and with the Hegemonic theory of international political economy.
5.1 Multilateralism
Euro currency was introduced to promote the idea of economic multilateralism among the
European Union members. It was destined to-
i) Establish a multilateral political, economic and social dialogue in the European
Union
10
.
ii) Strengthened cooperation among the member states
11
.
iii) Adopt a political and security partnership aimed at creating a common area of peace
and stability
12
.
iv) Introduce an economic and financial partnership designed to establish a common
zone of prosperity by promoting free trade
13
.



8
Cini, M. (2007) European Union Politics. Oxford University Press. Chapter 8: Rosamond, B. New Theories of
European Integration.
9
ibid
10
Euro-Mediterranean Partnership: implementation of the multilateralism aspects of the Barcelona Declaration.
Available at: europa.eu/rapid/press-release_MEMO-97-36_en.htm
11
ibid
12
ibid
13
ibid


7
5.2 Theory of Hegemony:
The relation of Euro vs. dollar can be defined with the theory of hegemony. There is a possibility
to come to an end of the hegemony of the United States after almost 100 years (since 1914 until
2014) of its domination. The most potential rival of the US is currently Europe to supersede the
hegemonic power after the war in Iraq. However, according to Immanuel Wallerstein
14
there are
three analogies that are must to possess to be a hegemonic state and those are:
i) The first analogy: Hegemony refers to have dominance in all three economic
domains such as: agro-industrial, in the commerce and in finance.
ii) The second analogy: hegemonic powers should have liberal ideology that means it
must support and promote free market economy, free flow of the factors of the
production throughout the world-economy.
iii) The third analogy: hegemonic power must have military power in all categories
such as naval force, air force and land force.
In this regard Europe is the next super power other than the US and Europe has great potential to
succeed the hegemonic power from the US. Europe has now a large economic domination in all
the three areas along with its own currency Euro (a potential world currency). Europe has been
also promoting liberal ideology within EU countries and with the other countries as well.
However, there is some lacking in military power in Europe compared to the US. This is a great
challenge to Europe in their road to be the hegemonic power.
Each hegemonic instance has its own currency such as Dutchs Peso; UKs sterling and USs
Dollar. Therefore to be the next hegemonic power it is must for Europe to establish its currency
Euro as a world currency.
5.3 Liberal Theory and Hegemony:
As per the second analogy of hegemonic power state should adopt liberal economic system
which means free trade, free market economy, minimal state intervention etc. Considering liberal
theory, European Union is highly a liberal regional initiative. EU does not refer to a particular

14
Wallerstein, I. (1983) The Three Instances of Hegemony in the History of the Capitalist World Economy.
International Journal of Comparative Sociology, 24, 1-2.


8
state, rather a set of state that has common interests, common values and norms. EU members
submitted their sovereignty to EU where they expect to have minimum state intervention. Euro,
as a common currency is also an outcome of this liberal belief. Therefore, it is clear that EU has
been trying to adopt liberal ideology in order to establish its hegemonic power as hegemonic
power requires liberal economy with a central authority. This central omnipotent power may not
be a single state; rather it can be the whole EU.

6. Literature Review:
C. Fred Bergsten (2002) wrote about the sole dominance of US Dollar and the ups and downs
of the Dollar at different periods since its dominance. He also pointed that the Dollar would not
have the dominant power if there was Euro during the inflation of 1970s and 1980s. he also
suggest different methods for euro to bypass the Dollar as world currency and he is too much
optimist about Euro to be the next dominant currency.
Menzie Chinn and Jeffrey A. Frankel (2007) discussed about the possibility of Euro to surpass
the Dollar as a worlds dominant currency. They also added the disadvantages of having an
international currency and described why china is still not so desperate about promoting its
currency as an international currency. They included lots of data regarding the holdings of
different currencies in different renowned central banks. Further they included the roles that an
international currency should take part in world monetary system. They added the emerging role
of Euro as a dominant currency and also how Dollar overtook the power of Pound. They also
included the acceptance of Dollar and Euro in worldwide monetary relations. They discussed
about the importance of international currency rankings and then showed the advantages of
international currency. Further they included a brief history of how the dollar overthrew pound
and became an international currency and then described how the dollar is in its falling status and
Euros usages so far. Later they also included some significant factors that suit a currency to be
an international currency.
Maria Lorca-Susino (2008) pointed out that the current exchange rate between the US dollar
and the euro has been considered a blessing for the US, it has become a matter of concern for
most Eurozone countries. The strength of the euro is becoming irritating for the Eurozone and,


9
nevertheless, the weakness of the US dollar is also pushing it to the brink of losing its status as a
global currency. He added that this exchange rate debate is accompanied by another debate
concerning how the latest monetary policy actions taken by the US and Eurozone monetary
authorities, aimed at solving current economic imbalances, are affecting the US$- exchange
rate. Scholars, economists, and politicians argue that these monetary policies seem unable to
solve todays economic problems in the EU as well as in the Eurozone, but are having a
tremendous impact on the US $- exchange rate. Kathleen R. McNamara (2008) introduced the
role of euro over the past few years and it is emerging as a reserved currency in European, Asia
and also United States. The use of Euro is in the level second in international monetary system
that is the next position of Dollar. He also discussed about the approach to the general
relationship between power and currency and how might currency rivalry reflect and shape the
broader balance of power between the United States and EU. Further he added the current and
likely future, state of play in the global usage of Dollar, Euro and other major currencies. He
concluded with that the Euro has many of the underlying economic factors that would make it a
peer competitor to the dollar, but that the necessary political power and social requirements are
missing to make it the focal point of the global economy.
Miguel OteroIglesias (2011) described in his working paper about different view of different
discipline over Euro and the Dollar as dominant currency. This paper also shows that a currency
can only become the top international currency if there is an active political commitment by
issuing authorities to make it the leading currency. He also added how existing IPE literature
presents the structural conditions of the international monetary system. Alan Wheatley (2013)
discussed the origins and use of currency power in the world monetary system and also the
power of US dollar. He also included the reserve currencies as instruments of coercion and
global trade and global currencies. Further he added the emerging power of Euro, Renminbi and
Yen that will shape Asia in a new way. He also discussed about the past, present and possible
future of internal monetary system. Kimberly Amadeo (2013) included a history of the exchange rate
since 2000 to 2013 of Euro to Dollar and also included the reasons behind the fall and rise of the
exchange rate of Euro to Dollar. He also added the process of how exchange rate converts Euros to
Dollars.



10
7. Conventional Wisdom:
There are two schools who define the future nature of Euro as a worlds dominant currency
overthrowing Dollar;
i) One is Euro skeptics and
ii) The other is Euro optimists.
Eurooptimists, who argue in favor of Dollar to keep its dominance, and the euroskeptics,
who points to the obstacles the European currency faces to dethrone the dollar
15
. According to
the euro optimist school, the Euro will eventually surpass the Dollar and become the
international currency. On the other hand euro-skeptics think that the Dollar will continue ruling
for almost next 20-30 years and Euro still has a long way to go to reach at the point of
international currency.
8. Alternative Explanation:
The euro was designed to ease the process of providing services, transporting goods and moving
capital between euro-using nations
16
. The goals of the euro were well thought out with the
highest of hopes, but the results have been mixed
17
. It was pegged in parity (1:1) with the U.S.
dollar during its onset
18
. Since the inception the value of the euro has been high, and it was
considered a safe haven during the banking crisis while investors fled from the U.S. dollar
19
.
However, many countries have learned over the years that a strong currency is not always as
good as it sounds
20
. The fate of euro is depend on only time. While it is still one of the most
attractive-looking currencies in the world, the grand design may be fading after over a decade of
life
21
. On the other hand a multi-currency system can be established where all the powerful
currencies will dominate.


15
Iglesias, O. M. (2011),The Euro vs Dollar Debate: A Review (WP), Elcano Royal Institute Madrid Spain
16
Schmidt, M. Behind The Euro: History And Future, available at:
http://www.investopedia.com/articles/economics/12/behind-the-euro-history-and-future.asp
17
ibid
18
ibid
19
ibid
20
ibid
21
ibid


11
Chapter III
9. Emergence of Euro:
The Euro currency was introduced on January 1, 1999 with the acceptance of the Maastricht
Treaty
22
. After the emergence of Euro, it was used as an electronic currency and become a legal
tender as a cash currency on January 1, 2002
23
. The Euro became the single currency of 12
European states in 2002 and other states joined the currency later
24
. Later Slovenia adopted Euro
in 2007, Cyprus in 2008, Malta in 2008, Slovakia in 2009, Estonia in 2011, and Latvia in 2014.
Lithunia will adopt Euro in January 2015. Today 18 out of the 28 member states of the EU have
adopted the euro as their currency
25
.
9.1 Euro countries:
Table:1

Austria


Belgium


Cyprus


Estonia


Finland


France


Germany


Greece


Ireland


Italy


Latvia


Luxembourg


Malta


Netherlands


Portugal


Slovakia


Slovenia


22
History of Euro, available at: http://www.euro-dollar-currency.com/history_of_euro.htm
23
ibid
24
ibid
25
ibid


12

Spain

Source: http://www.eurozone.europa.eu/euro-area/euro-area-member-states/

9.2 Politics behind Euro:
The euro was established as a triumph of politics over economics
26
. The single European
currency is a political construct and it was a vision cherished by a generation of leaders who had
experienced the Second World War
27
.
The Euro is a question of peace and war.
- Helmut Kohl (German Chancellor)
A second motive to establish the euro was to increase European standing in the world and
diminish the exorbitant privilege of the US over the years
28
.
The world economy would be better off with a morse symmetrical international monetary
system- in other words, a world that relied less on the dollar and in which the US, directly or via
the IMF, exerted less influence.
- 1990 European Commission Report.
With the launch of the euro in 1999, an assault on the dollars hegemony seemed possible:
overnight, a currency bloc had come into existence with a population greater than that of the US
and an economic output about three-quarters of the US
29
.




26
Wheatley, A. (2013), Chapter-2; pp 45-47
27
ibid
28
ibid
29
ibid


13
10. Current Status of Euro and Dollar:
The Euro is managed through a complex institutional process in which the European Central
Bank (ECB) plays a key role
30
. Because it has not been adopted by all of the EU member states,
it exists alongside the remaining currencies such as the pound sterling, the Danish Krone, and the
Polish Zloty
31
.
To understand the current status of Euro and Dollar in the world monetary system we must
understand the current exchange rate of Euro to Dollar. The euro to U.S. dollar conversion refers
to how many dollars the euro can buy according to its exchange rate
32
. It mainly compares
between euro's value and the dollar's value. For example, on August 28, 2013, the euro to dollar
conversion was $1.33. This meant one euro was worth $1.33
33
.
Table 2: Dollar Euro exchange rate 1999 2004
Euro to 1 US $
1999 2000 2001 2002 2003 2004
January 0.862814 0.987351 1.0667 1.13226 0.941605 0.791328
April 0.934604 1.05862 1.12048 1.12846 0.920756 0.834161
July 0.964629 1.06551 1.16103 1.00665 0.879984 0.815356
September 0.952685 1.17338 1.10531 1.01924 0.854156 0.799695

Source: Historic outlook, x-rates.com-website 20 January 2005






30
Cini, M. (2007) European Union Politics. Oxford University Press. Chapter 14: Smith, Michael. European Union
External Relations.
31
ibid
32
Amadeo, K. (2013), Euro to Dollar Conversion and History, available at: EurotoUSDollarConversion.htm
33
ibid


14
A decades history from 2000 to 2013 of Euro and Dollar conversion rate by Kimberly Amadeo
(2013) is given below:
2000-
2002
The euro traded in a narrow range, between $.87-.99, rarely breaking above a dollar,
until it was officially launched as a currency. The Euro was used only for electronic
transactions until 2002.
2002-
2008
The euro rose 63% in just six years the U.S. debt grew 60%
34
. In January 2002, a euro
was worth a little more than $.90 but by the end of 2007, its value had skyrocketed to
$1.4718.
2008-
2009
The euro started the year at $1.4738 and later the euro fell to $1.3919. The euro started
the year in a strong position, at $1.3946 and it then fell to the year's low of $1.2545 as
the ECB increased its rate to 1.5%.
2010 The euro started the year at $1.4419 and ended 2010 at $1.3269 that dropped 17%
against the Dollar.
2011 The euro started the year at $1.3371, rose to a high of $1.4675 in July, by October
2011, the euro's value had dropped to $1.3294 and by December, it was back to $1.33.
2012 The euro started the year at $1.274, rose briefly to a high of $1.3452 in February, in
May it plummeted to $1.2405, the euro rose briefly to $1.27 on June, by August, the
euro was only worth $1.2149 and by December 31, it had risen to $1.3186.
2013 The euro started the year worth $1.3195. It strengthened to $1.396 by February, it fell
slightly in March, to $1.2990, but recovered by November to $1.35, and it ended the
year up a bit at $1.3779.

Table 3: Global foreign exchange market: official FX reserves (percentage of world total)
1999 2000 2001 2002 2003 2004 2005 2006
US $ 70.9 70.5 70.7 66.5 65.8 65.9 66.4 65.7
Euro 17.9 18.8 19.8 24.2 25.3 24.9 24.3 25.2
Japan
Yen
6.4 6.3 5.2 4.5 4.1 3.9 3.7 3.2
Pound
St.
2.9 2.8 2.7 2.9 2.6 3.3 3.6 4.2

Sources: For 19992005, European Central Bank, The Accumulation of Foreign Re-serves, Occasional Paper
Series 43 (February 2006); for 2006, International Monetary Fund, Currency Composition of Official Foreign
Exchange Reserves (COFER), accessed at: http://www.imf.org/external/np/sta/cofer/eng/cofer.pdf. See also
European Central Bank, Review of the International Use of the Euro (2007: 44).

34
ibid


15
However to understand the current status of Euro against dollar we also have to look at the
currencies as accounting devices. In this regard the Dollar is still being used in half of the world
trade.
As provided by McNamara (2008), the US and the Eurozone countries use their own currencies
most frequently, un-surprisingly. An overwhelming 99% of the USs own exports, and 92% of
its own imports, were priced in dollars in 2003. Even in the Euro area, the Euro is less dominant,
and there is some variation across states: in exports the highest share of dollar invoicing is found
in Greece (46.1% in dollars, 47.3 in Euros) and the lowest dollar, highest Euro invoicing is in
Italy (17.5 and 74.9%, respectively)
35
. The new EU member states in Eastern and Central Europe
generally use Euros for invoicing more than the Eurozone states themselves: for example,
Slovenia in 2003 used Euros for 86.9% of its export financing, and Hungary for 83.1%
(McNamara: 2008). In contrast, Estonia, long a staunch US ally with a more distinctively
neoconservative stance, invoiced only 8.5% of their exports in Euros, and 70.4 in dollars and the
UK uses pounds for much of its invoicing, and splits its export invoicing between the dollar
(26%) and the Euro (21%)
36
. In total two-thirds of Eurozone exports and half of its imports are
settled in Euros
37
. The single currency holds an especially strong attraction for countries that
used to be in the Soviet sphere of influence.
More relevantly we should see the uses of Euro and Dollar outside the Eurozone and US, for
instance in major states of Asia, there euro uses even could not break double digits in export and
they are preferring dollar instead of Euro. Euro is lagging far behind the Dollar in Aisa.
The fate of the Euro is thus eventually dependent on the Dollars status. Current EU policy is
officially neutral regarding the international use of Euro
38
. However, if the Euro does increase its
political integration and institutionalization to the point where it can more readily project power
globally, the Euro is likely to quickly overtake the dollar and gain key currency status
39
.

35
McNamara, R. K. (2008) A rivalry in the making? The Euro and international monetary power, Routledge Informa
Ltd Registered in England and Wales.
36
ibid
37
Wheatley, A. (2013), Chapter-2; pp 48
38
McNamara, R. K. (2008)
39
ibid


16
Therefore, does this current trend indicate that Euro is going to supersede the Dollar? or the
Dollar should remain its dominance unchallenged?

11. Potentials of Euro of Being a Dominant Currency:
Great powers have great currencies.
- Robert Mundell
In international system, the US and Britain both have served as the geopolitical hegemony during
each time period of their key currency dominance
40
. The basic reason for the supremacy of the
dollar over the past half - century or more is that it has had no competition
41
. There was no other
economy that can even come near the size of the dollar. Hence no currency could acquire the
network externalities, economies of scale and scope, and public goods benefits necessary to rival
the dollar at the global level
42
. A largely similar situation during most of the nineteenth century
explains sterlings dominance in that period
43
.
There are some factors provided by Menzie Chinn and Jeffrey A. Frankel (2007) that suits a
currency for international currency status and those are:
i) Patterns of Output and Trade:
The U.S. economy is still the worlds largest in terms of output and trade, but the euro is now the
home currency to eighteen countries
44
. Their combined economic weight is much greater than
Germany alone or Japan and it is not quite as large as the United States
45
. But it may be in the
future, if the other three long-time EU members, United Kingdom, Sweden, and Denmark, were
to join today, euro-land would approximately equal the United States in economic size
46
.

40
ibid
41
Bergsten, F. C. (2002) The Euro Versus The Dollar: Will There Be a Struggle For Dominance? , Annual Meeting
of the American Economic Association Atlanta. Available at: http://www.iie.com/publications/papers/bergsten0102-
1.pdf
42
ibid
43
ibid
44
Chinn, M. and Frankel, A. J. (2007) Will the Euro Eventually Surpass the Dollar as Leading International Reserve
Currency? Available at: http://www.nber.org/chapters/c0126
45
ibid
46
ibid


17
ii) The Countrys Financial Markets
To attain international currency status, capital and money markets in the home country must be
not only open and free of controls, but also deep and well developed
47
. EU countries are too
much integrated in open borders, migration, flow of products and they are also developed
countries. Therefore there is a huge possibility lying ahead for EU to be a super dominant region.
iii) Confidence in the Value of the Currency
Confidence over a currency is in the highest priority for a currency to be the world currency. As
a new currency Euro could not gain as much confidence as the dollar has. However, the dollar is
losing its fame as a world currency because of some sudden crush of economy. Therefore, we
can anticipate that the dollar has great chances to fall down whereas the euro has significant
potentials to succeed it.
iv) Network Externalities
As we can see that euro is still not being used even by its own holder countries as well as by
Asian and other countries. On the other hand the dollar still has large network both in US and
among externalities. Therefore, euro is in less advantage in this road.
Scholars of hegemonic theory like Robert Gilpin, Keohene have explored the linkages between
the concentration of power in one state in the international system, and the degree and nature of
economic globalization in that system arguing that hegemony promotes openness (McNamara:
2008). Thus a single, dominant hegemonic currency is an essential part of this globalized
political order. Dominant currency can also project the hegemonic states identity abroad, an
example of the exercise of soft power
48
. Further a dominant currency can also bring the
potential of using hard monetary power (McNamara: 2008). Having all these advantages of a
dominant currency it also has some risks such as:



47
ibid
48
McNamara, R. K. (2008)


18
i) The value of currency is difficult to stabilize if vast holdings are in the hand of the other
governments in the form of foreign exchange reserves and same goes to debt insurance.
ii) Uses of currency worldwide will bring loss of control over currency over many aspects of
policy of currency use.
Source: (McNamara: 2008)
Therefore, as per the status of Euro, it is a burning question that whether euro is ready for this
risk or not. However, it is now dominating the dollar in global bond markets but only by some
particular measures. These bonds are notes issued by public bodies (national and sub-national
governments), private companies, and financial institutions for the purpose of borrowing money
on international financial markets. By one account, in 2006, such Euro-denominated bonds made
up 45% of total outstanding global debt in international markets, surpassing the level of dollar-
denominated debt, which was at 36%
49
.
Unlike the Dollar, Euro has no history of falling to a great extent which is a remarkable
advantage for Euro. The dollar experienced high inflation for almost a decade, from 1973
through 1981
50
. It has run large external deficits for most of the past 30 years, including two
periods when those deficits were rising at clearly unsustainable rates (1982- 87 and 1998- 2000),
and has become by far the worlds largest debtor country
51
. Further the dollar did experience
significant erosion of its global market share in the late 1970s and early 1980s
52
. Moreover, its
weakness and instability provided crucial impetus to the first effective efforts to create a
European alternative, culminating in the European Monetary System in 1979
53
.

It would be a mistake to ignore [the fact that] in the last 15 years US current account deficits
have turned the US from the worlds biggest creditor to its biggest debtorThe low - saving
high - debt problems will one day come home to roost.
- Robert Mundell 1998.

49
ibid
50
Bergsten, F. C. (2002)
51
ibid
52
ibid
53
ibid


19
Therefore if there is any future inflation of the Dollar comes then Euro is the biggest competitor
to replace it. At the same time solely reliance on dollar as reserve currency will also raise
question and find another successor in international monetary system. In this regard Euro has the
highest potential to achieve the status of world currency than Yen or Renminbi. Although the
Euro is very younger in its age, it is a fast developer and performing far beyond its level.
Dr Tanzim Uddin informed in this regard that euro still needs almost 30-40years to supersede the
Dollar. The current reserve of the dollar is declining day by day which indicates that there is a
possibility of the Dollar to lose its popularity and a new currency may take its place. However, at
present there are three currencies (European Euro, Japanese Yen, and Chinas Renminbi) that are
trying to replace the dollar as the international currency. In this competitive situation Euro has a
challenge to increase its reserve and also build confidence on it to overthrow the Dollar.
Otherwise there is a chance that Yen or Renminbi will supersede the dollar instead of euro. On
the other hand a new multi-currency system can also be emerged in future where no single
currency will solely dominate the world monetary system.













20
Chapter IV
12. Criticism:
The Euro is a common currency among a number of Countries but it is not managed by a single
government.
54
The European Central Bank does not report to a European Finance Minister and
there is no EU system of taxation or macroeconomic management.
55
There is no doubt that the
major Euroland have generally underperformed against their major global rivals like the Dollar,
Yen and Renminbi.
56

Dr. Tanzim Uddin informed that confidence on the currency is very significant as well as the
reserve of a currency. He also added that confidence over the Euro is still lacking in both the
Euro holder countries and the non-euro holder countries.
At the same time the use of euro in non European countries for international trade is still too low
because of their lack of confidence on euro. The reserve of euro currency is also small
comparing to the dollar.

Source: http://www.diffen.com/difference/Euro_vs_US_Dollar
However, there is an advantage that the reserve and confidence over the dollar is decreasing
because of sudden fall of USs economy in 1970s and 2011. It creates a space for euro to
promote confidence over it and increase its reserve and use in international trade. However, to
complete this process euro also may have to deal with its competitor like Yen and Renminbi.
Dr. Tanzim Uddin agreed that the euro to become the next international currency the EU need to
achieve the three analogies of hegemonic power. The Euro will be the next international

54
Cini, M. (2007). Chapter 14.
55
ibid
56
ibid


21
currency only if it can achieve control in the three analogies of a hegemonic power. Therefore,
only increasing the reserve or building the confidence on euro will be not enough. Rather EU
should also prioritize on increasing its focus on the other two analogies (Military power and
control over agro-industrial, finance, and commerce) to establish its euro as an international
currency. But the US still is on the top position in military power.




22
Table 4: Roles of an international currency
Function of money Governments Private actors
Store of value International reserves Currency substitution (private
dollarization)
Medium of exchange Vehicle currency for foreign
exchange intervention
Invoicing trade and financial
transactions
Unit of account Anchor for pegging local
currency
Denominating trade and
financial transactions
Source: Chinn, M. and Frankel, A. J. (2007)
Euro still is not capable enough to perform all these role of an international currency. Thus we
can predict that euro is still not suitable to be an international currency. It is just a teenager in
front of the dollar.

13. Recommendation for Euro:
First, Euroland will need to further integrate its money and capital markets to realize the full
international potential of its new currency.
Second, Europe will need to get its act together institutionally. The European Union has been a
fully equal partner to the United States in the management of the global trading system for many
years. However, Europe already equals the United States or, as in the case of integrating its
financial market. Moreover, organizational reforms that enable Euroland to act together and
speak with a single voice will probably be an essential prerequisite of full European equivalence
with the United States. Hence it dissipates much of the potential for realizing a key international
role for the euro.
Third, the international role of the euro would obviously be strengthened if Europe would
improve its economic performance. Euroland has already achieved convincing price stability but
achievement of dynamic growth may also be necessary for the euro to effectively challenge the
dollar.
Forth, international interest in the euro will surely riseand set in motion a self - reinforcing
cycle of euro appreciation and increased portfolio diversification into eurosif Euroland


23
countries are able to both overcome their continuing structural impediments and find a way to
employ more expansionary macroeconomic policies, e.g., by recognizing that the European
Central Bank ought to attach at least secondary importance to output goals and/or relaxing the
arbitrary ceilings for government budget deficits in the present Growth and Stability Pact.
Fifth, euro has to increase its reserve in order to survive in the competition with other emerging
currencies such as Chinese Renminbi and Japanese Yen.
Sixth, Euro currency holder countries as well as European Union need to promote Euro largely
and increase its usage (in both within Europe and all over the world) in order to establish Euro as
a world currency. It will be nearly impossible for Euro to be a world currency if its usage
remains only among the 18 member states of European Union.
Seventh, European Union as an institution should be more serious about promoting Euro and its
usage among the other EU member states at the same time among the other European states. EU
can introduce new monetary policy and increase its reserve and its usage in external trades so
that other countries find interest on shifting towards Euro for their exports and imports.
Eighth, EU can impose some binding policy about using Euro as the only currency for all kind of
trade for European countries.

14. Conclusion:
As noted earlier, the Euro has enormous potential for influence and activity in the world
economy, but it is equally clear that it faces a number of important constraints on its capacity to
turn potential into reality.
57

Jin Zhongxia, the head of research at the central bank (2013) in China said:
For the foreseeable future, we can speak of the global currency system as a framework of 1+4.
The dollar will continue to be the super reserve currency, supplemented by four smaller reserve

57
Cini, M. (2007). Chapter 14.


24
currencies: the euro and the British pound in Europe, and the Japanese Yen and the Chinese
renminbi in Asia.
Observing the current status the Dollar will dominate almost next 20-30 years with its present
power or at least judging by its share of international reserve. Besides, the dollar both reflects
and magnifies US soft power
58
. The US is promoting its dollar as moneta franca in the same
way it promoted English as lingua franca
59
. Therefore, Euro still has a long way to go to
achieve the world currency status and at the same time there is no surety of Euro becoming the
next single dominating currency. Rather a multi-currency system can also be flourished in the
future.













58
Wheatley, A. (2013)
59
ibid


25
Bibliography:
1. Amadeo, K. (2013), Euro to Dollar Conversion and History, available at:
http://EurotoUSDollarConversion.htm

2. Bergsten, F. C. (2002) The Euro Versus The Dollar: Will There Be a Struggle For
Dominance? , Annual Meeting of the American Economic Association Atlanta. Available at:
http://www.iie.com/publications/papers/bergsten0102-1.pdf

3. Chinn, M. and Frankel, A. J. (2007) Will the Euro Eventually Surpass the Dollar as Leading
International Reserve Currency? Available at: http://www.nber.org/chapters/c0126

4. Euro area member states, Eurozone Portal. Available at:
http://EuroareamemberstatesEurozone.htm

5. Euro-Mediterranean Partnership: implementation of the multilateralism aspects of the
Barcelona Declaration. Available at: europa.eu/rapid/press-release_MEMO-97-36_en.htm

6. History of Euro, available at: http://www.euro-dollar-currency.com/history_of_euro.htm

7. Iglesias, O, M. (2011), The Euro vs Dollar Debate: A Review (WP), Elcano Royal Institute,
Madrid Spain Informa Ltd Registered in England and Wales. Available at:
http://www.realinstitutoelcano.org/wps/wcm/connect/7dbc398045b3ad469983df5e7489e10f/
WP5-2011_Otero-
Iglesias_+Euro_Dollar_Debate.pdf?MOD=AJPERES&CACHEID=7dbc398045b3ad469983
df5e7489e10f

8. Krigman, P. (1984), The International Role of the Dollar: Theory and Prospect, University of
Chicago Press. Available at: http://www.nber.org/books/bils84-1



26
9. Lim, G. E. (2006) The Euros Challenge to the Dollar: Different Views from Economists and
Evidence from COFER (Currency Composition of Foreign Exchange Reserves) and Other
Data, IMF Working paper-153.

10. Lorca, M. (2008), The US dollar and the euro - Deus Ex Machina: The dollar may be our
currency, but its your problem, MPRA Paper No. 8855. Available at: http://mpra.ub.uni-
muenchen.de/8855/

11. McNamara, R. K. (2008) A rivalry in the making? The Euro and international monetary
power, Review of International Political Economy, 15:3, 439-459. Available at:
http://dx.doi.org/10.1080/09692290801931347

12. Mundell, R. (1998) The Case for the Euro I and II. The Wall Street Journal Interactive
Edition. Available at: http://myweb.liu.edu/~uroy/eco41/articles/mundell/mundell6a.htm
13. Portes, R. and Rey, H. (1998), The emergence of the euro as an international currency,
London Business School and CEPR; London School of Economics. Available at:
http://faculty.london.edu/rportes/EParticle.pdf

14. Schmidt, M. Behind The Euro: History And Future, available at:
http://www.investopedia.com/articles/economics/12/behind-the-euro-history-and-future.asp

15. Shams, R. (2005) Dollar-Euro Exchange Rate 1999-2004 -Dollar and Euro as International
Currencies, HWWA Discussion Paper 321.

16. Wallerstein, I. (1983) The Three Instances of Hegemony in the History of the Capitalist
World Economy. International Journal of Comparative Sociology, 24, 1-2.

17. Wheatley, A. (2013) The Power of Currencies and Currencies of Power, Routhledge.