The Research On Monetary Competition Between Euro And U.S. Dollar From Euro’s Perspective

Since the birth of international currency, competition between them began. In1944, the United States forged the establishment of Bretton Wood Monetary System with its super military and economic power. From then on, U.S. Dollar began to play the role of key currency in the world which was used to be played by Pound Sterling and a new U.S. Dollar era was unveiled. During the second half of20th century, the dollar epoch was almost impregnable. In1999, Euro came into being, which is a milestone in the history of international currency system and Dollar hegemony was threatened. Euro, the rising currency star, began to compete with and challenge the superpower of dollar, and a fierce battle between the two kicked off.Long before Euro came into being, the academic world had done many researches on the competition between Euro and Dollar, their ideas split. Some optimists had full confidence that Euro would gradually gain an equal status as Dollar’s while others questioned Euro’s future, saying Dollar would still be the most important currency and Euro could not shake up the Dollar Empire. However, after14years of development, Euro has made remarkable achievements. Today Euro zone has been enlarged to17member countries. Then we would wonder about many questions:What’s the current competitive situation between Euro and Dollar? Why should Euro compete with Dollar? What kind of problems has Euro met in its way to surpass Dollar? What’s the possible future for Euro? What are the consequences brought by monetary competition and what can we learn from it? This paper aims to resolve above puzzles.This essay can be divided into6chapters. The first chapter is introduction. It first introduces general background and research significance. Following that is literature review both by foreign researchers and domestic ones. Then it presents the research methodology, general structure, main innovative points and deficiencies of this paper. The second chapter presents the current competition status between Euro and Dollar from perspectives of currency anchoring, invoicing and settlement currency of the international transactions, international exchange reserves and international financial market. The third chapter discusses the reasons why Euro competes with Dollar. All in all, they are after interests. Once an international currency plays a key role in the monetary system, it would help the issuing country to enjoy abundant monetary seigniorage, to maintain excessive current account and fiscal budget deficit, to finance its economic development at competitively low cost. Besides, it would help the issuing country to have a say on the pricing of major international commodities and to distribute wealth worldwide, and even export domestic inflation and shift part of the cost of economic crisis to other countries. It is to fight for the above mentioned benefits; currency competition becomes fiercer and fiercer. The fourth chapter shows us major problems that Euro confronted when competing with Dollar. On one hand, Euro zone itself is not perfect, deficiencies of its internal mechanisms and the contradiction between the Euro zone’s economy and monetary union makes its competitive advantage less obvious. On the other hand, USA would go out of its way to hamper the expansion and development of Euro to safeguard its Dollar Empire. They might resort to its rating agencies and political and military power. In addition to that, this chapter also looks to Euro’s future, and concludes that even though Euro itself is on the edge of storm, there are still chances to re-establish itself. The future of Euro relies on whether Euro zone member countries can form a strong political union or not and whether they can establish internal withdrawing mechanism or not. The fifth chapter studies the consequences caused by currency competition between Euro and Dollar. As a result, the virtual degree of economy both in USA and Euro zone is being strengthened and leveraged, their economy is just like an inverted pyramid backed by a weakening real economy, which led to the instability of international monetary system. Apart from that, this chapter sums up some lessons learnt from currency competition which are:1. China should facilitate the development of entity economy, and steadily promote the expansion of the virtual economy;2. China should push the RMB internalization process step by step. And finally, the sixth chapter draws a conclusion for this essay. With the development of economic globalization, any change in the status of international currency would exert a significant effect on China’s economy. As world’s second largest economy and with the largest reserves, China is confronted with the dilemma of "big economy" and "small currency" and many other difficulties. Thus, it is extremely important to study this issue. This essay does an in-depth comprehensive study to monetary competition between Euro and Dollar making use of the latest data, and draws lessons from their competition. However, this essay does have many deficiencies. For instance, its analytical tools and research methodologies are not that advanced, and it ignores the perspectives of Dollar.