Eurasian reserve

Readers' Views No 234, October 2002
OECD Observer

You raise the question of whether the euro could one day become a more important international reserve currency (Observer No 230, January 2002). Yet you omit to mention the Panglossian forecasts of some economic commentators a few years back who had predicted a massive shift of international reserves into the euro and out of the dollar–with a consequent surge of the euro.

These predictions were not surprisingly way off the mark, as many of the component parts of the euro were "currency weaklings", which weighed down the euro like lead sinkers rather than help it swim up. And then, the lynchpin of the European economy, Germany, became the sick man of Europe.

The euro has gained in value recently of course, but is this strengthening durable? As you point out, there are structural reasons for doubting this. But one key point missing from your analysis is where are all those international reserves? According to statistics from the Bank of International Settlements, most of the world's official foreign exchange reserves are to be found in East Asia, especially Japan, China, Chinese Taipei, Hong Kong-China and Korea. These countries are just across the "Pacific lake" from the US, and mostly have very strong economic and political links with the US. Moreover, they all look up to the US as the global leader, and will take a long time to convince of any merit of swinging into euros.

The fledgling process of Asia/Europe international co-operation (ASEM), which recently held its summit in Copenhagen, left many observers still wondering whether this great idea will ever achieve anything. If Europe wants a strong currency, it may need reforms, but it will certainly have to strengthen its ties with those countries in East Asia that sit on the biggest piles of official foreign exchange reserves.

Cronulla, Australia

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©OECD Observer No 234, October 2002

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