The euro could surpass the dollar within ten years

One of the world's leading international economists explains how the euro could surpass the dollar as the premier international currency and examines the geopolitical implications of such a shift.

The International Economy recently asked experts: Ten years from now, which will likely be the next great global currency?

My answer is that it just might be the euro. Contrary to fevered popular speculation in the 1990s, the yen and the mark never had the potential to challenge the dollar as the leading international currency: their home economies were smaller than the US and their financial markets less well-developed and liquid than New York. The euro, however, is a credible challenger: Euroland is roughly as big as the United States, and the euro has shown itself a better store of value than the dollar.

To be sure, rankings of international currencies change only very slowly. Although the US surpassed the UK in economic size in 1872, in exports in 1915, and as a net creditor in 1917, the dollar did not surpass the pound as number one international currency until 1945. Thus one must account for the lags. In 2005, when Menzie Chinn and I used historical data on central bank holdings of foreign exchange reserves to estimate the determinants, even our pessimistic scenarios did not have the euro overtaking the dollar until 2022. Thus we could not have asserted that the dollar would be dethroned “ten years from now.”

But the dollar has continued to lose ground. We have now updated our calculations, particularly to recognize that London is usurping Frankfurt's role as the financial capital of the euro, notwithstanding that the UK remains outside of EMU. Now we find that the tipping point could come within the ten-year horizon: the euro could overtake the dollar even as early as 2015.

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