Strategic Panorama 2009 - 2010 - IEEE

The global recession and its impact on international economic relations
At the end of 2008, 45% of debt securities were in dollars and only 32%
in euro, even though the euro had upped its market share by 12 points
since its creation and the dollar’s had fallen by 5 points. The dominance
of the dollar is even greater in the reserves held by central banks: 64% of
the total versus the euro’s 27%, although the single currency has gained
nearly 10 percentage points since coming into existence.
Even so, there are two factors that may work in the euro’s favour in the
long term and have been heightened by the global financial crisis. The first
is the United States’ hefty current account deficit and fast accumulation
of government debt, which could hasten a lack of confidence in the dollar,
causing the euro’s share to grow in investor and central bank portfolios.
The second is the massive accumulation of reserves by the central banks
of emerging economies, which will possibly lead to greater diversification
of portfolios and the pursuit of investments providing better yields than
US Treasury bonds, which could favour the euro and other strong currencies.
Therefore, although it is unlikely that the euro will replace the dollar in
the next decade, it does seem possible that we are approaching a dual
monetary hegemony in the medium term, which would become a triple
hegemony in the long term when China opens up its financial system and
makes the yuan convertible. Most experts agree that the euro will not be
able to fully replace the dollar owing to the European Union’s military and
political weakness and the «anti-growth» bias of the ECB’s policies.(6) In
any event, in order to further strengthen the euro’s role as an international
currency, it is essential for the European Union to deepen its structural
economic reforms so as to enhance its growth potential, improve the
supervision and economic governance system of the euro area and further
integrate and deepen its financial markets.
CHANGES IN THE INTERNATIONAL ECONOMIC ORDER
The crisis is causing a major impact on the international economic
order. On the one hand it has reinforced trends that had been under way
for years, such as the rise of the emerging powers. On the other, it has
put a brake on (and may reverse) a trend that seemed difficult to change,
(6) See the essays by Guillermo De la Dehesa, (2009): «Will the Euro ever replace the Dollar
as the dominant global currency?» Working Paper of the Real Instituto Elcano, and
Jean Pissani Ferry and Adam Posen (2009): The Euro at Ten: The Next Global Currency,
Petersen Institute for International Economics, Washington DC.
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