Hi everyone. I'm not trying to steal ideas, because this is for an essay, but rather I just want to get an idea so I know where to start and where to look. I'm a first year economics students so I don't have that much background education in economics to help me make an objective, sound conclusion. I'm just looking for opinions and based on those I'll do some research on my own. What do you think, do you feel the euro is likely to replace the U.S. dollar as the major international currency? Why or why not?
Euro as we know it will be will be gone by Jan 1, 2015 (most likely much sooner). There is no possible way to keep all those countries economies stable under the current Euro system.
That is a very good point, I had not thought of that. So, you're saying that if an economy collapses so will the currency? So couldn't that happen to the U.S. too? Why is the U.S. dollar the major international currency? What makes it that? Sorry if my questions are dumb, like I said, I don't have much of an economics background.
You should start by researching the prototype to the EURO, the ERM and read about why the GBP has to leave it in 1992. http://en.wikipedia.org/wiki/European_Exchange_Rate_Mechanism The Euro did two things: 1) Make it easier for European companies to manage currency risk and therefore make cross border business easier. 2) Cut European's buying power in half. Why the Euro won't replace the USD anytime soon: (In addition to the fact that we are intering into a global deflation during which the USD will probably continue to strengthen) Economic reasons: There are too many internal economic divergences between EURO members for the Euro to take on the role of the main reserve currency. The rates the CB sets affect both Irish mortgage rates and German T-Bills. When you have countries growing and expanding at different paces, this is a recipe for disaster. Political reasons: With the potential inclusion of Turkey in the EURO zone, you'd have a member country that borders both Iraq and Georgia--two very volatile regions. Also the reserve currency is usually backed by the strongest military power. Europe does not qualify in this case.
Well, in the case of the EURO, there would probably be some members that would leave first, therefore creating a drop in confidence among traders and then causing a currency attack. My money is on Ireland to leave first (if this were to happen). It can happen to any currency but at the moment the USD is at least perceived as being the best safe-haven. The reaons for this started after WWII when the world's economies were crushed (including Britain's, whose GBP until that point held the prime reserve currency status). The US's economy was actually strengthend by the war, as it created many factory jobs and got the country out of an economic slump. It also kick started the military industrial complex which has followed us to this very day. Bascially the US was the only one left standing after the war and the world needed a stable currency backed by a booming economy to take over the role as reserve currency. Also, look up Bretton Woods.
I guess I'm the contrarian here. I think this recession is going to end up uniting Europe more. The monetary policy needed to combat it is going to be consistent across the board for their countries, so they will be able to start agreeing on courses of actions that all the countries can follow. You've seen bickering between the countries, but now that the reality has set in that they're all in deep doodoo, they're cooperating quite nicely, as evidenced by coordinated rate cuts. I don't think using evidence from 1992 is very useful, since the Euro was brand new at that point. No one knew for sure if it would survive, and it was still an experiment. Countries were using their own currency and the euro. It could have easily fallen apart at that early stage. Now, it's more established. Yes, it can still fall apart, but at that early stage, nothing much was at stake if it fell apart. If you search, already the euro has replaced some of the reserves of dollars for the world. So, it's not a completely new concept. The forces I see at work against the US and the dollar are what really make me think it is possible. The world right now is in a really bad mood, they are looking for a scapegoat, and are looking at change to make things better. I really believe the truth of things is that they always move in cycles, and right now we're just in a bad cycle. But, most people don't think that way. They need to blame someone/something for bad things, and then they try to replace those someone/somethings with a new and different one (evidenced I think by our recent election). Right now, the wrath of the world is centering squarely on the US for this whole financial mess we're in. Is that fair? No, not really. Does it matter if it's fair? No, not really. Mostly, they are focusing on the irresponsibility of the US in our markets and our attitude of capitalism and speculation in general. They feel we need more regulation and they feel we need to be stripped of our power over the world and punished, basically. Please look up news stories detailing China's attitude about the dollar and things Sarkozy has to say about the US and its speculating. Keep in mind the EU and China have already discussed proposals they will bring up together at the financial summits (modern day Bretton Woods) happening starting Nov 15. So, if the US and capitalism is out of fashion, what is in? It seems to be regulation and socialism, which is what the EU loves the world to think they excel in. Once again, I think this attitude is obviously evident, even in the US. I think power will naturally shift to those countries seen as more responsible, which means more regulated, as the blame is placed squarely on the wild-west cowboys who caused all this (Americans). The point was made that the country with the best military usually has the most trusted currency. Once again, I think there's a shift in attitude going on about this. Instead of feeling protected by the US military, the world is feeling we are irresponsible bullies that need to be subdued. The world feels more things should be solved with diplomacy. Also, the perception of our military might is shrinking, I believe, since we are stretching ourselves thin and frankly, running out of money. Also of interest should be our huge government debt, the waning interest of China and Japan in buying that debt, and once again the perception of the world about how we are using that debt we are incurring with money we have borrowed from them.
Even on ET, the notion of Euro-as-toast is the mainstream view. The MSM is littered with similar stories. No question being a Euro-believer is the contrarian position.
I guess we'll get our answer soon enough anyway, those meetings start Nov 15, just about a week away, and the EUR/USD is in a nice consolidating triangle that needs to break one way or another.