Currencies play an important role in supporting national and global economies. The Euro is commonly used in the European Union (EU) member countries and the US dollar has a wider rate of acceptability beyond Europe. In this essay, the role of the Euro as a powerful global currency is analyzed. Key sections of this paper explain how a currency can reach global status, the advantages and disadvantages of this status, and the importance of global business currencies to international trade and finance.
Importance of Global Currencies
Global currencies are essential tools that support the growth of international trade and finance. They account for a majority of global foreign exchange reserves and stocks of loans and debts around the world (Larue, 2022). Indeed, most of the world’s central banks keep their foreign cash reserves in US dollars or Euros (Arghyrou, 2017). China alone has more than $3.2 trillion in foreign exchange reserves, most of which are in US dollars (Tran, 2022). During times of crisis, governments leverage these reserves to maintain their fiscal and monetary soundness (Larue, 2022; Arghyrou, 2017). Additionally, major world currencies, such as the Euro, can promote prudent debt management if they are used to standardize the value of loans (Naisbitt, 2018). Illustratively, by denominating debt using stable global currencies, investors can better exercise financial prudence in loan negotiations and repayments.
A Currency’s Rise to International Status
Subject to the importance of global currencies to international trade, it is important to question how a country’s currency can rise from obscurity to global prominence. Today, the US dollar enjoys this status, but in the 19th century, the British pound was the most powerful global currency used in the world (Larue, 2022). Causes for an increase or decrease of currency values are varied; however, changes in demand and supply forces have received the highest mentions (Lai and Goh, 2021). Due to these reasons, the US dollar is the most commonly sought currency because of America’s dominance in global finance and international trade. Additionally, from a fiscal management perspective, the US dollar has been accepted as the world’s reserve currency because most countries view America as a transparent and robust economy (Lai and Goh, 2021). These beliefs about America and the US dollar maintain the perception that its currency is valuable. Therefore, nations that have had powerful currencies shared the same profile as the US today.
Advantages and Disadvantages of a Global Currency Status
Having a country’s currency gain prominence and become the world’s most sought legal tender comes with several benefits and drawbacks. For example, one of the main advantages of having such a currency is the pride and prestige accorded to the host country for owning the currency (Aftab, Shah and Ismail, 2019). Additionally, by having their money as the world’s reserve currency, residents of host countries do not experience currency fluctuation risks or pay for conversion costs when transacting abroad (Vermeiren, 2019). Comparatively, one disadvantage of the global currency status is the diminished ability to control currency supply (Aftab, Shah and Ismail, 2019). Host countries may equally experience increased incidences of currency counterfeiting because of a surge in the number of players trading their currencies around the world (Aftab, Shah and Ismail, 2019). These insights demonstrate that the global currency status comes with unique strengths and weaknesses.
This paper has demonstrated that the Euro’s position as the second most important currency is influenced by its potential to act as a global foreign exchange reserve currency and a default debt denominator. Despite its lackluster adoption outside of Europe, the Euro has immense potential in gaining global acceptability. Its influence in the world will most likely come from the recognition as a world reserve currency and its adoption as the main currency medium for guiding debt negotiations.
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Arghyrou, M. G. (2017) ‘Structural reforms in the Euro area: a Greek view’, European View, 16(1), pp. 45–56.
Lai, W. C. and Goh, K. L. (2021) ‘Dependence structure between Renminbi movements and volatility of foreign exchange rate returns’, China Report, 57(1), pp. 57–78.
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