European countries, may be seen as a future international currency, replacing U.S. dollar.
CHALLENGES TO THE DOLLAR 美元的挑战
In general, Money is defined in terms of three functions in domestic level: medium of exchange, unit of account, and store of value. In an open economy, where both real and monetary sectors of economics are interrelated on the international level, the unit of account should also be able to fulfill these three functions on an international level. While we speak about an international currency, official and private sectors should be distinguished. The following table summarizes the three functions of money:
First, country's share in world output and trade - It is more likely for other countries to use the currency of a country with a larger share as a monetary anchor (Eichengreen, 1998; Frenkel and Sondergaard, 1999; Frankel, 2000). Second, macroeconomic stability - Here we should mention that price stability is of a great importance in order to maintain the international role of currency (Hartmann and Issing, 2002). Third, financial market development - It is more likely to use those countries' currency for intervention purposes that are distinguished with their financial markets in terms of larger size and liquidity (Eichengreen, 1998). And the last but not least, network externalities -The more countries use a currency as a medium of exchange, the lower will be transactions costs and higher its liquidity, which makes it attractive for new users (Gaspar, 2004).
Empirical studies showed the very importance of those factors. The existence of these factors led the U.S. dollar to become the dominant currency. But at the same time, the factors of international currency status tend to change slowly inducing inertia (Cohen, 2000). The economists agree about the influences of the above mentioned factors, though there exist different views about the importance of each. According to Bergsten (1997), EU accounted for 31% of world output and 20% of world trade (excluding intra EU transactions). It is true that euro is more liquid than its predecessor currencies, but if its liquidity is more compared to U.S. dollar it is arguable (Galati and Tsatsaronis, 2003). The dollar's share on the international market decreased from 94% in 1998 to 89% in 2004. Dollar/Euro was the best traded currency pair in 2004 occupying 28% of global turnover, compared with U.S. having 27% of world output and 18% of the world trade. At the same time Bergsten/Mundell see euro's role as a stable store of value. Mundell stated: "diversification effects are inevitable" and "the fact that the bulk of international reserves are held in dollars makes that currency a sitting duck in a financial crisis".
McKinnon (1998) believes euro may become the world's most important regional currency. His ideas are based on the premises of large economic size, which is the main factor to suggest a role for euro beyond its political borders, though the economist believes it will not be able to replace U.S. dollar. Only events like massive inflation in the United States, causing destabilization of dollar's value in terms of goods and services, may lead to displacing the currency from its leading position. Mckinnon also speaks about dollar as a vehicle currency. It accounts about 90% of interbank transactions outside Europe and represents the main invoice currency for primary commodities such as oil, copper and wheat, as well as the developing and smaller industrialized countries use dollar as their exports' mai
