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TERM PROJECT IN EB III

On

Is Euro replacing Dollars?

Submitted to

Prof. Mahima Sharma

Submitted By:

Divyank Gupta (PGDM09051)

Gyan Prakash (PGDM09055)

Hari Shanker Tewari(PGDM09056)

Harsh Nagar (PGDM09057)

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Table of Content

Acknowledgement………………………………..1Objective of study………………………………...2Premise of the study………………………………3Introduction……………………………………….

 

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ACKNOWLEDGEMENT

This project itself is an acknowledgement to the inspiration, drive andvaluable guidance contributed to it by many individuals. This projectwould never have seen the light of day without the help and guidance thatwe have received.

We would like to express our sincere appreciation and thanks to Prof.Mahima Sharma (Faculty- EB-III) under whose valuable guidance,constant interest and encouragement we have completed this project. Shehas devoted her ever precious time from his busy schedule and helped usin completing the project.

We would like to thank each and every person who has helped us directlyor indirectly, in making this project.

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Objective of the Study

The main objective of the project undertaken by us is to find out whether Euro is replacing Dollars in international trade.

In order to achieve our main objective, we need to find out these things- Position of Euro in the world market in monetary terms since its

inception

Attitude of world market towards Euro

Performance of Dollar after the arrival of Euro in the world market

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Methodology

The methodology of the study is solely dependent on the secondary data

available through various sources i.e. internet, magazines, books andother sources.

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Euro Zone

Introduction

The eurozone officially the euro area, is an economic and monetary union (EMU) of 16 European Union (EU) member states which haveadopted the euro currency as their sole legal tender . It currently consistsof Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland,Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Eight (not including Sweden, which has a de facto opt out)other states are obliged to join the zone once they fulfill the strict entrycriteria.Initially started with eleven members, in 1998 eleven European Union

member-states had met the convergence criteria, and the eurozone cameinto existence with the official launch of the euro on 1 January 1999.

Monetary and Fiscal Policies

The monetary policy of all countries in the eurozone is managed by theEuropean Central Bank  (ECB) and the European System of Central Banks (ESCB) which comprises the ECB and the central banks of the EU

states that have joined the zone. Countries outside the European Union,even those with monetary agreements such as Monaco, are notrepresented in these institutions. The ECB is entitled to authorise thedesign and printing of euro banknotes and the minting of euro coins, andits president is currently Jean-Claude Trichet.

The primary means for fiscal coordination within the EU lies in theBroad Economic Policy Guidelines which are written for every member state, but with particular reference to the 16 current members of theeurozone. These guidelines are not binding, but are intended to represent

 policy coordination among the EU member states, so as to take intoaccount the linked structures of their economies.

For their mutual assurance and stability of the currency, members of theeurozone have to respect the Stability and Growth Pact, which setsagreed limits on deficits and national debt, with associated sanctions for 

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deviation. The Pact originally set a limit of 3% of GDP for the yearlydeficit of all eurozone member states; with fines for any state whichexceeded this amount. In 2005, Portugal, Germany, and France had allexceeded this amount, but the Council of Ministers had not voted to finethose states.

Economic Comparison Table of Eurozone with other

economies (2006)

Population GDP(in €) % world Exports Imports

EU(27) 494million

11.9trillion

21% 14.3%GDP

15% GDP

UnitedStates

300million

11.2trillion

19.7% 10.8%GDP

16.6%

Eurozone 317million

8.4trillion

14.6% 21.7%GDP

20.9%GDP

Japan 128million

8.5trillion

6.3% 16.8%GDP

15.3 %GDP

GDP in PPP

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  Will the Euro Replace the Dollar?

Perhaps the authors of this research "argue that the euro's rise to major international currency status may no longer be as implausible as many

may believe.

The Impact of the Euro and Prospects for the Dollar

Will the euro replace the dollar as the leading international currency?With two-thirds of all international reserves still held in U.S. currency,the challenge of the euro appears remote. Indeed, this was the widelyheld view when the euro was introduced less than a decade ago. Theeuro's growing appeal comes from several factors: the euro zone iscomparable to the U.S. economy in terms of GDP and trade openness; theEuropean Central Bank has kept inflation in check; the EU experiencesnothing like America's current account deficit and external debt, whichapply considerable pressures on the dollar. In a 2005 survey of central

 banks, most respondents said they intended further diversification awayfrom the dollar, and several have recently made public announcementsalong these lines.

Papaioannou and his colleagues study the composition of central banks'foreign exchange reserves. Reserve growth in recent years has been

dramatic, with emerging markets and developing countries tripling their reserves since 1998. In addition, rising prices for oil and other commodities have increased foreign reserves in fuel-exporting countries.These reserves come primarily from U.S. current account deficits. Even alimited shift out of dollar assets, the researchers say, could result insignificant exchange rate movements - in particular, sizable dollar depreciation.

The analysts assess the impact of the euro on international reserveholdings. The results show an increase in the shares of both the dollar and

the euro in recent years at the expense of other currencies, with the eurogradually becoming more important, especially in the developing world.

Among their findings, Papaioannou, Portes, and Siourounis report thefollowing: the optimal euro share is actually lower than what theyobserve. This suggests an increasing international role for the euro. Sofar, however, this increased internationalization comes primarily at the

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expense of the yen, Britain's pound sterling, and the Swiss franc rather than against the dollar.

In addition, in recent years the spreads on transactions in the euro havefallen sharply and have narrowed significantly for other industrialcountries' currencies as well, thus making diversification away from thedollar more attractive. The researchers have perform some simulationsfor four emerging market countries (Brazil, Russia, India, and China) thathave recently accumulated large foreign reserve assets and find larger weights for the euro than the aggregate estimate for the "representativecentral bank." This indicates that the euro's challenge to the dollar mightoccur sooner than imagined.

Finally, the authors find that the reference currency, or the choice of risk-

free asset, is the chief determinant in the optimal composition of reserves.But in practice, where there is a managed exchange rate regime, thereference currency is naturally the currency or currencies to which acountry's own currency is pegged. This suggests a major challenge to thedollar if more countries move away from managing their exchange rateswith respect to the dollar and adopt euro-based anchors or baskets inwhich the euro figures strongly.

Today, the U.S. dollar as a foreign reserve currency is the largest amongthe nations of the world. The drop in the U.S. currency exchange rates

against the E.U.’s euro raises the question of whether the dollar willfollow the historical lead of the U.K.’s pound in losing its status as thedominate international reserve currency among the world's nations.

In an October 12, 2009 article "Dollar Reaches Breaking Point as BanksShift Reserves, report that Barclays Capital data show a 63% secondquarter 2009 increase in euro and yen foreign reserve investments. AU.S. Treasury Department report states that from the end of 1999 tosecond quarter 2008, foreign reserves in dollars fell from 71% to 62.5%,while euro holdings rose from 18% to 27%. The E.U.'s euro wasintroduced in 1999 at a one to one parity with the U.S. dollar. By July2008, one euro cost one dollar and fifty-seven cents. This suggests that aone dollar transaction received the equivalent of approximately a 64 cent

 price value in a dollar-euro exchange by the summer of 2008.

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Central Banks Reduce U.S. Currency Exposure

India and China have eased up on U.S. treasury bond investments sinceJune 2009. According to a November 3, 2009  Economic Times ( ET )article "The Dollar Reserve Currency Conundrum" by U R Bhat, the twocountries were among the nations feeling the need to diversify foreignexchange assets and increase gold reserves.

“The diversification is part of a secular trend which is a good trade-off  between yield and safety,” said Hemant Mishr, MD, head-global markets,South Asia, Standard Chartered Bank, as reported by ET . Foreign reservetransactions among global central banks report reduced exposure to U.S.currency and an increase in diverse foreign currency assets.

In a July 15, 2009 article, the  BBC News reported that China has theworld’s largest foreign exchange reserves at more than $2 trillion, the

 bulk of which is in U.S. treasury bonds. A November 24, 2009 ET article,however, reports that China invested nearly $150 billion in U.S.treasuries between September 2008 and March 2009, but since April2009 it has reduced its investments to about $30 billion.

Currency Diversification & the Rise of the Euro

Launched in January 1999, the euro has risen to become the second

largest currency holding as foreign reserves. The euro now claims about aquarter of allocated foreign reserves.

As early as September 2007,  Reuters reported that former U.S. FederalReserve Chairman Alan Greenspan was quoted in a weekly Germanmagazine Stern saying it was “absolutely conceivable that the euro willreplace the dollar as the dominate foreign reserve currency, or will betraded as an equally important reserve currency.”

Econometric analysis by Jeffrey Frankel and Menzie Chinn also indicatesthat the euro could replace the U.S. dollar as the major reserve currency

 by 2020 if: (1) depreciation trend of the dollar persists into the future or (2) if E.U. members, such as the U.K., adopted the euro by 2020.

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BRIC Nations Call for “International Currency”

While few currency analysts believe that the dollar will be replaced as theworld’s dominant foreign exchange reserve anytime soon, calls amongthe so-called BRIC nations – Brazil, Russia, India, and China – for theestablishment of an international currency suggests major changes aheadunless confidence in the value of the U.S. dollar stabilizes.

Russia has the world’s third-largest foreign reserves, about half of whichare in dollars and the rest in euros and pounds. As reported by GlebBryanski for  Reuters, Russia called for the dollar’s replacement as theworld’s benchmark currency in 2009.

A variety of factors are placing pressure on the value of the U.S. dollar asa safe haven asset, raising the question of whether there will be aneventual replacement of the U.S. dollar as the world’s top foreign reservecurrency. If the euro or a so-called international currency replaces thedollar as the reserve currency, many analysts agree that the U.S. couldface higher interest rates, increased taxes, and reduced economic growthfor the long-term.

Update 05/13/2010: The dollar gained 6.1% during 1st quarter 2010

against the euro. (DOW JONES NEWSWIRES 05/13/10). The dollar exchange rate was .79c for one euro on 5/13/10.: This article is for informational purposes only and creates no attorney-client relationship. Itshould not be used as a substitute for tax or legal advice.

For the first time ever, the value of all euro notes in circulation exceededthe value of all dollars in circulation. The total dollar value of all euros incirculation (at the end of 2006) was $828 billion, compared to $753

 billion worth of dollars.

Even more ominous is the fact that many countries are diversifying awayfrom dollars into euros (or threatening to do so).

• Russia has threatened to price its huge oil and gas exports in eurosinstead of dollars as part of a strategic shift to forge closer ties withthe European Union, and to hedge against the falling dollar. Russiais the world's second largest oil exporter.

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• Sweden has cut its dollar holdings, from 37 percent of central bank reserves to 20 percent, with the euro's share rising to 50 percent.

• UAE Converts Dollars to Euros – The declining U.S. dollar hascaused the United Arab Emirates, a close U.S. ally, to converteight percent of its $25 billion foreign exchange reserves intoeuros. Kuwait and Qatar have indicated that they plan to makesimilar moves.

• Other countries, including Russia, Venezuela, Indonesia and Iranalso have decided to cut their dollar reserves or, in Iran's case, start

 pricing oil in euros. Iraq has priced its oil in euros since 2000.

Fred Bergsten, director of The Peterson Institute for InternationalEconomics, predicts that within 5 to 10 years, half of all global financecould be conducted in euros.

The euro is the first currency in 100 years that can really compete withthe dollar on a global level. The U.S. dollar has been the dominantcurrency because it's had no competition. The creation of the eurochanges all that.

The U.S. is the world's largest net debtor, and the world's largest net borrower. What is not commonly known is that the main financiers of theU.S. deficits are not U.S. allies such as Japan and Europe, but rather competitors such as China, Russia, and Middle East nations. In fact,

China holds 20 percent of all foreign reserves (roughly $1 trillion), whichcould create a sticky political situation, given China's growing economic

 power and its status as a massive exporter.

Ben Bernanke's dollar crisis went into a wider mode yesterday as thegreenback was shockingly upstaged by the euro and yen, both of whichcan lay claim to the world title as the currency favored by central banksas their reserve currency.

Over the last three months, banks put 63 percent of their new cash intoeuros and yen -- not the greenbacks -- a nearly complete reversal of thedollar's onetime dominance for reserves, according to Barclays Capital.The dollar's share of new cash in the central banks was down to 37

  percent -- compared with two-thirds a decade ago.Currently, dollars account for about 62 percent of the currency reserve at

central banks -- the lowest on record, said the International Monetary

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Fund.

Bernanke could go down in economic history as the man who killed thegreenback on the operating table. After printing up trillions of newdollars and new bonds to stimulate the US economy, the Federal Reservechief is now boxed into a corner battling two separate monsters that coulddevour the economy -- ravenous inflation on one hand, and a perilousrecession on the other.

Investors and central banks are snubbing dollars because the greenback iskept too weak by zero interest rates and a flood of greenbacks in theglobal economy.

They grumble that they've loaned the US record amounts to cover its

mounting debt, but are getting paid back by a currency that's worth 10 percent less in the past three months alone. In a decade, it's down nearlyone-third.

Economists believe the market rebellion against the dollar will spreaduntil Bernanke starts raising interest rates from around zero to the highsingle digits, and pulls back the flood of currency spewed from US

  printing

Economists warn that a jump in rates will clobber stocks and cripple thealready stalled housing market. "Bernanke's other choice is to keep ratesat zero, print even more money and sell more debt, but we'll see triple-digit inflation that could collapse the economy as we know it. "The socalled stimulus is what's toxic -- we're poisoning ourselves and the globaleconomy with it." Russia seems to realize that the ruble will not be theworld’s reserve currency and that the euro makes more sense at this time.

When the British pound ceased to the world’s reserve currency, that hadnegative effects on the British economy. If the dollar is replaced (and it

will be) this will have more profound effects on the US economy thanmost Americans realize. The UK simply did not have anything like thetype of debt the USA now has when the sterling was being replaced.

The Europeans have been more concerned about the value of the euroduring this economic crisis and have refused to greatly increase debt.This has raised the value of the euro among many as the logical

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replacement for the USA dollar as the world’s reserve currency. Andwhile that could change, right now it looks like the Europeans have takensteps for that to come to pass.

The Bible tells of a time when a European economic power will rise up,and we are starting to see this before our very eyes right now. And eventhough there will sometimes be drops in the value of the euro, the longterm outlook for the USA is that it will ultimately be worth nothing.

Some articles of possibly related interest may include:

Russia: Its Origins and Prophesied Future: Where do the Russians comefrom? What is prophesied for Russia? What will it do to the Europeansthat supported the Beast in the end?

Europa, the Beast, and Revelation: Where did Europe get its name? Whatmight Europe have to do with the Book of Revelation? What about “theBeast”? What is ahead for Europe?Prophecies of Barack Obama: Are there biblical and non-biblical

  prophecies about Barack Obama. Did Nostradamus predict Barack Obama dealing with the Antichrist? Might Barack Obama set the stagefor the kings of the North and South as his timing and at least one Shiite

 prophecy suggests? This is the longest and most detailed of the articleshere at COGwriter related to prophecy and Barack Obama.

Since its creation and consolidation as an international currency, the eurohas triggered extensive academic debate on its potential for unseating theUS dollar as the anchor of the world economy. The analyses vary greatly,and for now there is no clear consensus. Research focuses on thestrengths and weaknesses of the two monetary zones and because of thisit reaches disparate conclusions. However, where there is homogeneity isin the point of view. Almost all of the research centers on analyzing theUS and the euro zone and on reflecting academic studies, interpretationsand assessments from experts and politicians in these two areas. ThisARI seeks to examine the same issue from a different perspective. Here,the goal is to study how the financial elites of the emerging countries(especially the BRICs –Brazil, Russia, India and China–) see the rivalry

  between the dollar and the euro in their struggle to be the world’s benchmark international currency.

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The results presented here come from a review of secondary literatureand documentary and archival work, but mainly from 40 semi-structuredinterviews with financial leaders in Brazil and China. Those interviewedinclude senior officials of the finance ministries, central banks andgovernment-owned investment banks, private banking executives,finance and economics professors from prestigious universities, analystswith leading think tanks and journalists from media specializing infinance. The choice of China and Brazil for this study stems from their important role in defining the international currency of the globaleconomy. China is on the verge of overtaking Japan as the world’ssecond-largest economy, and its foreign currency reserves total nearlyUS$2.5 trillion. Meanwhile, Brazil is an emerging power that is amongthe world’s 10 largest economies and many times it has served as thestandard-bearer for the BRICs in international negotiations.

Here we present the three most important lines of argument that emergedfrom our research. The first centers on the discontent of the Brazilian andChinese financial elites with how the dollar is performing as the maininternational currency during the current economic crisis. The currencythat anchors the system should be stable in terms of inflation andexchange rates. The second condition is not being met, and the first is in

 jeopardy, as a result of which these leaders are starting to seek alternativesolutions. One of these might be to replace the dollar with a currency thatis stronger and more stable, such as possibly the euro. In the second partof this study, however, we explain why the euro is not an option for theseelites. For the time being, the material influence of the European singlecurrency is limited. But its impact in the area of ideas has been verygreat. In the third and final section we will show how the financial elitein Brazil and China have come to consider the euro a good example of monetary cooperation that should be imitated in their respective regions.The euro has shown the elite that monetary regionalization, and evenglobalization, is possible. And it has inadvertently triggered a race to winover geo-monetary space outside the dollar’s sphere of influence, one in

which the Europeans have started off with something of an advantage butwill soon lag behind if they do not wake up.

The dollar was highly volatile before the current crisis, but its volatilitygrew after the failure of the investment bank Lehman Brothers inSeptember 2008. At first, the dollar suddenly shot up because of investors’ aversion to risk (proving, by the way, that it is still the

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currency that investors trust the most). But once the worst of the crisis passed, the dollar dropped sharply against other currencies. Many of theBrazilians that took part in our study, and most of the Chinese, referred tothe Triffin Dilemma with regard to the greenback. It holds that thecountry which issues the international currency cannot at the same timeoffer the world the necessary liquidity without also weakening its balanceof payments. In other words, the dollar’s central position in the systemforces the US to constantly increase its deficit. But there comes a pointwhen this deficit is unsustainable and investors lose confidence in thedollar. This would not be bad for the US, which could thus quicklydevaluate its foreign debt. But it is in fact a problem for China, which hasUS$2.4 trillion in its central bank coffers. The big fear of China’sfinancial elite is that the US might reduce its debt through the inflationgenerated by injecting enormous amounts of dollars. This is known as

quantitative easing (QE), a measure taken by the Fed when interest ratesget close to zero.

  Is the Euro a Good Alternative?

Therefore, the Chinese find themselves in what Paul Krugman has calledthe ‘dollar trap’ or what Larry Summers labeled the ‘balance of financialterror’. Can the euro become an alternative for getting out of this

 predicament? Over the past 10 years the euro has proved itself to be acurrency with a stronger exchange rate and a more stable inflation ratethan the dollar. Furthermore, the EU is the main trading partner of bothChina and Brazil. So why not dump the dollar and switch to the euro?Those interviewed said the idea in and of itself is appealing, but it will

 probably not happen. The big problem with the euro is that it does nothave a public debt market that is liquid enough to compete with USgovernment debt. In Europe, there are different treasury bonds from thevarious countries of the euro zone, so those markets are much morefragmented and much more reduced. As one senior official close to theChinese central bank explained it, if China were to start investingaggressively in any of the European public debt markets, that market

would collapse in a matter of days. The price of the bonds would gothrough the ceiling, and interest rates would hit rock bottom. Euro-zonedebt markets are simply too small for a player the size of China.

Most of the Chinese and Brazilians interviewed for this study think thearrival and consolidation of the euro in the international financial systemis a good thing. They view it as an anti-hegemony action by Europe that

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will discipline the US in its monetary policy and establish greater competition and, therefore, greater efficiency, in the internationalmonetary system. Most of those interviewed reject the theory of hegemonic stability, according to which the global monetary systemworks better with just one international currency. They say having two or three international currencies does not necessarily make for conflict.Indeed, they say the more competition there is, the better. For this reasonmost of those who took part in the study are in favour of a stronger andmore united Europe. Many even express disappointment with the lack of 

 progress in EU political integration. One participant went so far as to saythat the Chinese are more pro-European than the Europeans themselves.In the multipolar world that both the Chinese and Brazilian financial eliteaspire to, one important pole should be the EU. But for the EU to achievethis it needs a common economic and foreign policy. Creation of a pan-

European public debt market depends precisely on this kind of progress.The euro will be able to compete with the dollar only if this integration isachieved; furthermore, it would require the creation of a pan-Europeanfinance ministry (a step that is unlikely for now because of reluctance onthe part of Germany). Until this happens, the European currency will not

 be an alternative.

The Importance of the Idea of the EuroIn any case, the financial decision-makers in Brazil and Chinaacknowledge the progress that the euro has made. Most of them praisethe currency. For many, the creation of the euro is a unique event inmonetary history. Many consider it a step that will shape an era. Manyalso see this financial crisis as the first big test for European monetaryunion. In this crisis we are seeing precisely the shortcomings that comewith having monetary union without the economic and political unionneeded to ease tensions that are only natural when one tries to juggledifferent production and growth models under a single monetary policy.Despite the difficulties faced by countries such as Portugal, Ireland,Spain and, above all, Greece –which some Anglo media such as the

 Financial Times have described as being on the verge of abandoning theeuro zone– most of those interviewed do not see the possibility of monetary union falling apart. To the contrary, they say that this crisis willshow the Europeans the need to come together even more. For theChinese and Brazilians, it is simply a matter of survival. The Europeansmust either unite or fall behind. And the natural thing would be for themto close ranks, although it might take time.

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Confidence in the European project is great: so much so, that the veryidea of creating a monetary union has stirred enough interest among theelite of these two emerging nations for many of those interviewed toacknowledge they would like to build something similar in their regions.That is one of the unexpected results of this study. The impact of the euroon the BRICs’ financial elites has not developed mainly at the materiallevel; in other words, the physical realm of the coins and notes that

 people hold in their hands. It is not that these financial minds have justnow seen the strengths of the euro zone and are going to replace their dollars with euros. That is not the case. Rather, what is sinking in aboutthe euro is the very idea of it: the idea of creating a monetary union, or, inits absence, monetary cooperation so as to be better protected fromturbulence coming out of the dollar zone. For this elite class, the euro is amodel to emulate, although not to copy.

It is thus that we are seeing monetary cooperation initiatives gainingmomentum in both regions. In the case of Brazil, the first step has been tostart billing bilateral trade with Argentina in one of the two localcurrencies, thus dodging the volatility of the dollar. This programmeinspired by the euro has gone well, and now the idea is to introduce theLocal Currency Payment System in the entire MERCOSUR region. Inrecent years China has also made major efforts to encourage monetarycooperation in South-East Asia as part of what is known as the ChiangMai Initiatve (CMI). The idea over the long term has always been tocreate a single regional currency like the euro. For now, however,

  political tension and historic rivalry between Japan, China and SouthKorea have blocked progress towards this goal. But the Chinesegovernment, aware of these difficulties, has not held back. Since early2009 it has been promoting the Chinese yuan as an exchange currency for regional trade relations. To do this, it has signed monetary agreementswith its neighbours, including Hong Kong, South Korea, Malaysia andIndonesia.

The influence of the euro’s example as a trans-national currency evengoes beyond the regional aspect. For many Chinese who took part in thestudy, when the Governor of China’s central bank, Zhou Xiaochuan, withexplicit support from the BRICs, proposes IMF Special Drawing Rights(SDR) as possible substitutes for the dollar, he is clearly referring to theeuro, the only currency based on a sharing out of national sovereignty.Those interviewed in Brazil also see a linear, abstract relationship

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 between the consolidation of the euro, the formation of other regionalcurrencies and the creation some day of a global currency in which thereis a distribution of sovereignty between the world’s major powers. This isan idea that has sprung from Europe. Let us not forget that it was theEuropeans who, in the late 1960s (right when the Triffin Dilemma firstemerged) pressured the US to introduce SDR in international paymentsystems.

 Now, however, the BRIC proposal has not stirred much enthusiasm inEurope (because of a lack of interest due to the strength of the euro, and

 because of the lack of a common pan-European position, or out of respectfor the US) and naturally it has been rejected outright by the US. In anycase, this lack of support from the Europeans and Americans has notweakened the BRICs’ drive. To the contrary, it has prompted them even

more to press on with their goal of boosting monetary cooperation as away of avoiding using the dollar. Brazil and China have already begun tomarket their products bilaterally in their own currencies, and Russia isexpected to follow suit soon. Brazil has even considered the possibility of 

  billing its bilateral trade with the EU in euros, but the EuropeanCommission opposes this. While the Europeans were the first to ask for the creation of SDRs, and the first to create a single currency at theregional level, the lack of a common policy regarding the use of the euroat the international level might cause them to lag behind in the race todetermine what currencies are going to be used in trans-regional trade inan increasingly multipolar world in which the BRICs will hold more andmore sway.

 

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  Conclusions

The conclusion of this study is that the dollar is a disappointment asregards the way it is performing as the anchor of the global economy. In

addition to the huge current account deficit that the US has suffered for decades, now there are the difficulties that this superpower faces with itswars in Iraq and Afghanistan and the grave consequences of the financialcrisis. The world’s leading currency tends to be backed up by the world’sleading nation, and in the view of many of these financial leaders the USis no longer the economic model to follow or the engine of world growth.The era of aggressive, made-on-Wall Street financialisation has come toan end, and with it the era of the dollar as the top international currency.

The time has come for alternatives, and the consolidation of the euro is afirst step in that direction. It is not going to take over for the dollar asanchor currency over the short term. The European currency is still far from having that capacity, mainly because there is no pan-Europeanmarket for public debt, nor a pan-European fiscal policy. However, theeuro has in fact begun a new era in the configuration of the internationalmonetary system. It is showing the financial elite of the emergingcountries how, through regional monetary cooperation, countries canavert the volatility of the dollar when times are bad. With the euro astheir source of inspiration, both Brazil and China are boosting regional

trade in their own currencies. Their desire to do without the dollar goeseven further and now most BRICs have set the goal of billing their 

 bilateral trade in their own currencies. If this initiative prospers, thecurrencies of Russia, China and Brazil, as countries that dominate their regions, will consolidate their roles in those regions and the race to usecertain currencies in trans-regional trade will be well under way.

Even though it launched this race, Europe for now seems unprepared tostay up front in it. As it does not have a common position on the use of the euro at the international level, in other words, as it lacks a joint

 project for the euro, the euro zone is in a position of weakness withregard to the US and the emerging powers. One good example is thecurrent crisis. The region that is now bearing most of the costs of it is theeuro zone. This is because it is the only power with an undefinedexchange rate policy. The US was happy to let the dollar fall because thisallows it to boost its exports. China has its currency anchored to the

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dollar because it does not want the yuan to appreciate against thegreenback. Brazil, when it saw the real rising too much, imposed a smalltax on short-term entries of capital to ease upward pressure on itscurrency, curb the bubble in the asset markets and increase tax revenue.What about Europe? What is the euro zone doing? For now it is at themercy of the markets, which makes things hard for European exporters.The French President Nicolas Sarkozy has said this situation isunsustainable and that exchange rate volatility is inadmissible. Will he beable to convince the Germans and the rest of the euro zone countries todevelop a common policy? As some of those interviewed for this paper said, it all depends on Europe’s politicians. If they come together, Europewill decide jointly what the new international monetary system will be. If they do not, Europe will fall behind.

Country currency code 2008 2007 2006 2005 2004 2003Eurozone Countries[23] Euro EUR 0.6734 0.7345 0.7964 0.8038 0.8039 0.88402002 2001 20001.0575 1.1166 1.0827