August 5, 2005

Study considers euro as next reserve currency

by brian_turner

A study published earlier this week by the National Bureau of Economic Research said that the euro could replace the US dollar as the dominant reserve currency globally within the next twenty years, possibly as soon as the year 2020.

The paper was written by Jeffrey Frankel of Harvard University and Menzie Chinn of the University of Wisconsin at Madison. The authors claim that recent troubles seen by the euro would not stand in the way o this switch if the dollar continues to weaken.

The study names two circumstances which would be necessary for the changeover. First, the eurozone will need to expand to the point where its gross domestic product exceeds that of the United States and it overtakes London as an international financial center.

Also, US economic policies would have to undermine confidence in the dollar by creating inflation and depreciation of the dollar.

Some or all of the 13 European Union members, including the UK, that do not now belong to the European Economic and Monetary Union would likely have to join the euro to spur its ascendancy over the dollar, and the dollar would have to continue to depreciate.

Frankel and Howard studied several decades of shifts in reserve holdings to come to their conclusions.

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