Monday, March 24, 2008

Euro to replace $ as the reserve currency


This crisis could bring the euro centre-stage
Wolfgang Münchau
Source: Date: March 23, 2008
We know the credit crisis is a clear and present threat to the global economy. But its most important long-run legacy may not be economic, but geopolitical.
I was reminded of that possibility when reading a recent analysis by Professors Menzie Chinn at the University of Wisconsin and Jeffrey Frankel of Harvard*. They ran a simulation showing that the euro would replace the dollar as the world's largest reserve currency within the next 10 or 15 years. Their analysis is not based on this crisis. But the crisis could easily accelerate the trends they have identified.


The potential geopolitical implications of such a projected shift are immense. For a start, the US will lose its exorbitant privilege - the ability to achieve permanently higher returns on foreign assets than the returns paid to foreigners who invest in the US. The dollar will suddenly cease to be "our currency, and your problem". Influence in international financial institutions will wane. Losing the dollar as the world's leading international currency not only leads to a loss of political power. It constitutes loss of power.

There is little politicians can do to prevent such a seismic shift. I suspect the US political establishment is not yet aware of what is going to hit it. Then again, the same can be said of European political leaders, who have not given us any hint yet that they are ready to deal with the responsibilities that come with running the world's leading currency.

Cited in: J. Frankel, The euro could surpass the dollar within the next 10 years,

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