Will the euro become an equivalent competitor to the American dollar?

  • Petr Pavlík

Abstract

The main purpose of this article is to show by selected case studies to what extent the euro has already managed to establish itself as one of the key international currencies from the point of view of various aspects, to what extent it fulfills the functions of an important international currency, and what are the prospects of the euro’s position in the future. Various signals indicate that the euro already fulfills some conditions which would allow it to become a serious competitor to the dollar in a relatively short period of time. The article is also taking notice of some obstacles and drawbacks that the European Economic and Monetary Union (EMU) has to and will have to deal with.First of all, the author deals with the question of whether the eurozone is an optimum currency area. This is one of the principal theoretical problems which has been accompanying the EMU since the very beginning. Then he shifts his attention to the question,concerning what role does the euro play in the world economy at present from the point of view of the share of the eurozone on the world GDP, trade, official foreign exchange reserves, selected indicators of financial markets etc. Then he deals with the role of the euro in the world monetary system – one of the main subsystems of the world economy. Here is presented a survey of countries which have accepted the euro as its single or main currency, and also countries whose currencies are narrowly linked to the euro by means of various exchange rate mechanisms. The next part of the article outlines the potential of the euro in its “conquest” of further regions of the world. Both those where the euro is becoming or will become the number one currency (e.g. in the countries of Central and Eastern Europe) in a foreseeable future, and those where it will compete with the American dollar (e.g. in Latin America, in the Middle East etc.). In the final part, the author attemptes (use the same tense) to point out some problems which can influence what?missing subject, if and to what extent the euro really will become a strong and stable currency. At the moment, it is not yet possible to answer concisely and clearly the question of whether the euro will become an equivalent competitor to the American dollar. It is important whether the EMU will or will not break up in the course of the coming years or decades. So far, there have not appeared any signals of this kind. It will be substantial how the member countries of the eurozone will be able to handle the first serious crisis, e.g. analogical to that of 1992–1993. At that time, the exchange rate mechanism (ERM) was abandonned temporarily by the Italian lira and permanently by the British pound. This crisis of the European monetary system has shown the difficulty or even incapacity to set such a monetary policy which would be simultaneously advantageous for all member countries of a certain monetary system. The question is whether it is possible considering there are usually big differences in economical standing between individual countries. A similar or even a more serious crisis could emerge in a longer time horizon. The EMU thus stays a long term project and a long distance run. It is, however, possible to assume that within the next ten years, it could become totally clear whether the EMU project is a great success or a great error.

Author Biography

Petr Pavlík

 

 

Section
Consultations