Twenty-three years after its birth, the euro is still struggling to compete with the dollar

Just over twenty-three years after its creation, and twenty years after the introduction of banknotes and coins, the euro is by far the second most widely used currency in the world. But it is not close to seriously competing with the dollar, far from it. This semi-success – or semi-failure, depending on the point of view adopted – can be seen at all levels.

In 2021, the single European currency represented around 20% of the reserves of the world’s central banks, compared to 60% for the dollar, according to the annual balance sheet of the European Central Bank (ECB). That is four times more than the yen, the world’s third largest currency, but three times less than the greenback.

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For international bonds and international loans, we find approximately the same ratio between the euro and the dollar, the former being three times less used. The only area where equality is close concerns cross-border payments for world trade: the euro is around 38%, the dollar at 42%. The 12% slide of the former against the latter since the start of 2022 – around parity since August 22, the lowest since 2002 – symbolizes this mixed result.

The most enthusiastic projections of the 1990s seem light years away. In 1995, American economists Jeffrey Frankel and Menzie Chinn claimed that the greenback would be dethroned by the euro within the next two decades, provided the United Kingdom decided to join it or the dollar continued to fall. In 2008, they reiterated their predictions: “Even with the UK out [de la zone euro] (…), we believe that the euro can overtake the dollar as early as 2015.”

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The dollar, a “safe asset” of reference

They pointed to the well-known weaknesses of the dollar. For decades, the United States has suffered from “twin deficits”: that of the state budget and that of the balance of current accounts. They are therefore extremely dependent on the rest of the world for financing. At the same time, they are using the dollar weapon more and more often. When the Taliban took power in Kabul in the summer of 2021, Washington froze the reserves of the Afghan Central Bank. They did the same with Russia when they invaded Ukraine on February 24.

In March 2020, as lockdowns in Europe caused panic in the markets, investors rushed into the greenback

Conscious of the danger, countries like Russia have been trying to move away from the dollar zone for several years. In 2017, the Russian Central Bank had almost 50% of its reserves in dollars. At the time of the invasion, it was around 16%. However, with each financial crisis, the dominance of the dollar reappears.

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