Most currencies are more or less linked to the dollar or the euro, even if very few of them have strictly fixed exchange rates. Up to now, the use of the euro as an anchor currency has been confined to Europe, its immediate vicinity and some African countries, leaving the rest of the world to the US dollar influence. The long-lasting prevalence of the US dollar as an anchor currency has however been more and more challenged for several years and some evolution has begun to take shape, especially since the start of the present financial crisis.
Many countries have loosened the link of their currency to the US dollar in the global financial crisis that started in July 2007, a fact that may be explained by relying on the literature of contagion across markets. It has been a continuous rumor, especially in the last five years, regarding whether the euro will challenge the supremacy of the dollar as the leading international currency. The literature covering the debate can be divided into euro-optimists, who argue in favour of this thesis, and the euro-sceptics, who point to the obstacles the European currency faces to dethrone the dollar.
These two differing hypotheses have continued to the present day despite the sovereign debt crisis in the Eurozone (EZ). For those who have always been sceptical about the future of the euro, the crisis has reaffirmed their conviction about the unfeasibility of the European Monetary Union (EMU) project in the long term. It confirms their assessment that the euro in its present state is structurally flawed. By contrast, in the view of the euro-optimists, the current crisis is part of the natural evolution of a currency that is still very young.
This existential crisis, very common in the teenage years, might end in ‘suicide’ (the possibility cannot be excluded), although the most likely outcome is that European policymakers will improve the EMU’s structural framework and that the euro will emerge from the crisis strengthened. As in the past, the current state of businesses gives ammunition to both sides of the debate. For euro-sceptics it is difficult to see how Eurozone peripheral countries such as Greece, Ireland, Portugal and Spain will be able to generate growth and repay their debts within the straightjacket of monetary union.
For euro-optimists, however, the crisis is a golden opportunity to establish some sort of fiscal union which will consolidate the European Monetary Union. For this camp, the establishment in May 2010 of the European Financial Stability Facility (EFSF), financed through what are de facto Eurobonds backed by all EZ member states, is already a proto-fiscal union that will enhance the attractiveness of the euro internationally.
Recent, Chinese, Japanese and Middle Eastern interest in buying national debt from EZ peripheral countries, and especially Eurobonds issued by the EFSF (Mallet & Wiesmann, 2011; Milne & Oakley, 2011; Whipp, 2011), is clear proof that the euro will continue to be seen as an alternative to the dollar in the foreseeable future. Given the importance of this debate in the past, present and future of international monetary relations, the aim of this paper is to provide the evolution of these two currencies on the financial markets in recent years.
The first part of the paper presents elaborately the two contending economic hypotheses on the euro’s challenge to the dollar that have emerged since the 1990s. Subsequently, by presenting currently available economic data on the international use of the euro and the dollar, it shows how after 11 years in existence, the European currency has underperformed in relation to the euro-optimists’ expectations. The economic data publicly available vindicates those who have always been sceptical about the possibility of the euro challenging the dollar.
As will be shown below, roughly speaking, the dollar still accounts for 60% or more of global transactions and reserve holdings, while the euro is struggling to reach the 30% mark. But economic data alone do not explain the entire story, especially if they are incomplete (data for international trade invoice and central bank foreign reserve allocations, for instance, are only partially available). The numbers are representative enough to prove that the euro is far from challenging the dollar, but it is also true that they do not explain in full why that should be the case.
The second part of this paper looks at the IPE literature. By studying the political aspects, several International Political Economy authors have greatly enhanced our understanding of the topic. They have been able to make obvious the political weaknesses of the euro and the relative strengths of the dollar. In the third section of the paper, however, it is argued that these political-economic analyses, mostly based on structural tendencies, are not comprehensive enough to understand all of the inroads opened up by the euro in its challenge to the dollar.
A more social and ideational analysis is therefore required. Drawing on a more constructivist understanding of money, the third part of the paper shows that the euro and the dollar not only compete in the economic and political spheres but rival each other in day-to-day social activities also. The euro has developed symbolic social effects that can only be discerned by focusing on agential behaviour and understanding.
In this regard, the agencies that can be considered to be in a vantage point are the chief economists and senior executives of private or state-owned commercial banks and public foreign reserve management divisions at the central banks in both developed and emerging markets. In the last part of this paper it will be presented two case studies related to this issue. The first one is related to the economic and debt crisis and possible consequences for Euro currency as a consequence of the events occuring in Portugal , Ireland, Italy, Greece and Spain. The second case study concerns the US Dollar evolution due to the US subprime mortage crisis.