The Euro as the Second Reserve International Currency

The second place for the main used of the reserve currency in international is the Euro, which is mainly acknowledged, and this is the currency for the European country. The US Dollar currency are dominating reserves currency since the last decades. During the last 10 years, the Euro reserves currency are decreasing in a slow rate meanwhile the US Dollar going strong increasing their reserves currency worldwide making the Euros hardly to become the world currency. Although the United States are much smaller compared to Europe country, and obviously the European have a huge population of nearly 330 million people, the Euro currency still cannot top better than US Dollar in a meantime. The eurozone is an area located in the Europe country with a very huge population of nearly 330 million people. To be in the safe Eurozone gives so much advantages and disadvantages to the country itself which is somehow related and linked to the determination of the world reserves currency. The greater advantage gained by the eurozone is that there is no fluctuation of the exchange rate as their country keeps the lower tariff in trading with other countries. When a country decided to lessen their rate of tariffs, there will be a lot of trading happening outside and inside to the country but unfortunately, the Central Bank of Europe (CBE) assigned that the trading will mainly be taken part within the eurozone only. As this situation happened, the demand of the Euro currency is increasing meanwhile the supply is decreasing due to the lack of trading from the outside of the zone. This decision that made by the government of the European Union are hindering the Euros to be major and main use currency in the world.

As one-third of the international trade in the world are using Euro as their exchange currency and 20% of the reserves currency from the central bank are dominated in Euros and many other countries also issued debt in this currency. This is started when the President of America, Donald Trump is putting a lot of tariffs on international trade so the Americans will buy fewer products abroad and there will be fewer Dollars inside the circulation. So, many countries will switch trading to the Europe countries instead of America due to the lower tariff. In the last of two years, Europe has reduced tariffs with Japan, Mexico, and many other countries. This will make the European would buy more abroad and instantly the currency of the Euro will become increase in the financial circulation and this mean could be a moment where instead of having one hegemonic world currency, the world might have two at the same time which is the US Dollar and Euro. But having Euro as a world use currency is not really helping much rather than Dollar. If there is a big demand for Euros, the European Central Bank will have a bigger margin to print money without devaluing it.

Looking back at the history of European, during the late of 1970s, the Europe country were open to trading with each other although the European Union is not existing yet, this familiar activity was known as the “common market”. Nonetheless, there was a problem that each country had its own national currency, and each currency function in a quite different way. For example, the German Mark's currency was strong and stable but the Italian Lira was devaluating during that event. For a better understanding, when the people work for German Bank and lending 1 million Liras to the Italian company and at the moment a million Liras are worth 1000 German Marks. But then it’s time for that Italian company to return or pay back the money, the Lira currency has been devalued. So, even if the German Bank get 1 million Liras back when change it to the local currency, the German Bank actually received only 900 German Marks and this a total loss to the German Bank. Therefore, in order to avoid this situation, the European politicians' cooperation with the economist decided to attempt the ‘The Snake in the Tunnel’ model which is the metaphor for the currency fluctuation as the currency going up and down apparently looked like a snake goes up and down in the tunnel. By putting the snake into the tunnel, the snake could not move forward in a large direction but only within the tunnel, and this scenario is best explained that the currency will not fluctuate too much. During late 1980s, due to the unstable economy that going up and down drastically forcing ‘The Snake in the Tunnel’ model to dissolve. While the next decade, by the year of 1992, the European politician and economists again decided to make a common currency that everyone can use without any conflict and fluctuation that is called The Maastricht Treaty and this is how the three steps process to create a single currency started. In 1999, as the Euro started to grow strong and stable, most of all the EU stock market started listing in Euros and later on European citizens begin to use new coins for their daily trades.

The Bank of German claimed to have a single currency used in their country and this should be an advantage for the German country that they can lend some of their money to an Italian or Greek company. So, when there is no currency risk because of the single currency, German Bank will be having more money to be lend it to the poorer country such as Italian, Greek and Spanish companies, and all the sudden the rich countries also started to invest in a poor country which will soon lead to the world economic crisis. Generally, the company of the Southern European are the first ones to go bankrupt during a world crisis as their economy are and not stable and also known as the risk of the contingent. This is explained why during the world crisis which is the year of 2008, so many politicians and economists suggested to abandoning the Euro and most of them propose about the creation of two different Euros which is one for a country that is solid and stable and another one is for the poorer country.

Nowadays, the Euro is still alive and strong, and this is because the European Central Bank also known as ECB is a modern-day of Babel Tower and it works similarly as country’s government. The current president named Mario Dragui and the executive board of the Governing Council that have legislative power were the representatives from all the Eurozone countries including the countries such as Spain, France, Germany, Lavinia and the entire countries that have euro as their home currency. These countries are the real decision-makers which is they can decide whether to decrease the interest rates or to print more or less money in the country. Although they are the legal of the decision-maker in the market circulation of each country’s economy representatives, they must reach an agreement first with each other and this scenario would lead to the problem between the decision-makers. This fact can be proved that there was once happened when the certain Southern country want to print more money while the other Northern country was against the idea and since they can not come to any agreement, they started to make their own possible drastic decision. This should not be a problem when having a currency that cannot devalued because those who are in charge of printing it does not agree with each other. The fact that if the value of the money does not often change and also there is a low inflation, people would start to increase the daily expenses or be capable enough to start to invest more in longer-term without being afraid of losing their money.

The reason why the Euro currency is very stable because based on the figure 1.1, the comparison between monetary supply and M2 of the European Central Bank and American Federal shows that both of Euro and USD are increasing in the parallel line at almost the same rate. In the last of 20 years, the euro has become as solid and stable as the American Dollar and they have reached the lowest inflation rate. The America Federal Reserves has two main goals which is first one is to keep inflation and employment low meanwhile the European Central Bank have only one main goal which is to be put a whole control of the monetary stability. And undoubtedly, The European Central Bank have achieved their main goals.

Despite the Euro is solid and abundant as the US Dollar, but there is still a huge constraint for the euro currency to take over the title of the international currency and be stronger than the Dollar currency. Today, the Eurozone has about 320 million inhabitants which is almost the same as the United State of America but despite the European economy being smaller and poorer than America, the Eurozone can increase and become bigger as the new country started to join in. In the last 10 years, 6 new countries have decided to join the Eurozone as their new home currency and despite the political climate not currently in much favorable, Poland of the Nordic country might end up joining the euro some point as well. If this was not enough, there are many other countries that are linked to the euro such as Ivory Coast and Senegal have a common currency called the CFA Franc. In other words, with so many people using Euros in their daily lives, there are enough coins out there to make it easy for any company to get them. Although there is a lot of people using Euros, the Chinese Yuan also known as RENMINBI has a bigger user in worldwide. But most people still choose to use Euro instead of the Yuan because the Yuan currency are surprisingly full of flaws. As a country of China is a big and huge, the population in that country also large and those Chinese people use Yuan for their daily transactions. This means high great demand for this currency and lots of notes and coins in the market circulation and at first glance, this supposedly should be enough for the Yuan to become an international reserve currency. China does not want Yuan to leave the country as they put the amount of US$15,000 annual personal cap on overseas bank card withdrawals. This is why they put lots of capital controls in place. In other words, finding Yuan in the international market is not an easy job. In fact, China wants to avoid Chinese businessmen taking money out of the country. Hence, the Chinese People’s Bank has lots of restrictions. This should be a strong reason on why Yuan still can not surpass the Euro currency as a worldwide reserve currency.   

29 April 2022
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