The Dollar and the Euro

Abstract

The creation of a single European currency will be the most important development in the international monetary system since the adoption of flexible exchange rates in the early 1970s. The dollar will have its first real competitor since it surpassed the pound sterling as the world's dominant currency during the interwar period. As much as $1 trillion of international investment may shift from dollars to euros. Volatility between the world's key currencies will increase substantially, requiring new forms of international cooperation if severe costs for the global economy are to be avoided. The political impact of the euro will be at least as great. A bipolar currency regime dominated by Europe and the United States, with Japan as a junior partner, will replace the dollar-centered system that has prevailed for most of this century. A quantum leap in transatlantic cooperation will be required to handle both the transition to the new regime and its long-term effects. The global economic roles of the European Union and the United States are nearly identical. The eu accounts for about 31 percent of world output and 20 percent of world trade. The United States pro vides about 27 percent of global production and 18 percent of world trade. The dollar's 40 to 60 percent share of world finance far exceeds the economic weight of the United States. This total also exceeds the share of 10 to 40 percent for the European national currencies