Dollars versus the euro: will dollar be the dominant currency in ten years’ time? essay

There are several advantages of the U.S. having its own currency as compared to the European countries using the Euro: a) the American economy can better respond to crisis situations and financial shocks because the country has a unified monetary policy, unlike the Eurozone; b) there is a greater flexibility of workforce, investments and greater cultural commonality between the states compared to the European countries; c) the instruments of monetary and fiscal policy in the United States are used quicker and in a more efficient way than the assistance provided by the Eurozone to failing economies, and d) the United States is more financially, politically and economically integral than the Eurozone.

Given the current strength of the U.S. dollar, the U.S. government is likely to continue lending large amounts of money at low interest rates for at least a year; after that time, interest rates will gradually increase and the volumes of borrowing will start declining. The current position of the Fed to keep the interest rates low allows to expect at least 6 months of active borrowing. However, the notable improvement of economic growth expected in 2015 and soaring budget deficits in the United States urge the Fed to start increasing interest rates eventually (Wiseman & Crutsinger, 2014), so it is likely that in 2016 interest rates will slowly go up.

Current dominant position of the dollar at the international market compared to the euro’s position is conditioned by several factors. First of all, the currency is one of the instruments of monetary policy, which, along with fiscal policy, is used for responding to business cycle changes in Keynesian model (Jaffe, 2011). The United States currently uses expansionary monetary policy in order to stimulate the economy, to attract investors and to encourage spending (Jaffe, 2011). At the same time, the Eurozone is not so consolidated in fiscal sense as the United States (Groux, Rady & Maniam, 2011). While all countries in the Eurozone have the same currency, their monetary and fiscal policies are different, and the framework for making monetary decisions is still emerging in the Eurozone (Rose & Dickens, 2012). Therefore, while the United States can quickly respond to crises using a sound combination of monetary and fiscal measures, the ability of European countries to use monetary measures is limited since they cannot control the currency as the United States does (Rose & Dickens, 2012).

Secondly, the leading position of the dollar in the role of the world’s currency is explained by greater attractiveness and openness of the U.S. economy compared to the Eurozone. The GDP of the United States grows significantly faster than GDP of the Eurozone – 3.9% and 0.2% of GDP growth accordingly in the first quarter of 2014 (Trading Economics, 2014). The economy of the United States is decently recovering from the consequences of the 2008 financial crisis, while the recovery in the Eurozone is quite slow. These processes are explained by notable economic, political and financial diversity witnessed in the Eurozone. Different countries have varying economic priorities, different (and often conflicting) political interests, diverse approaches to governmental regulation of the economy.

Furthermore, economic health of the Eurozone members is also quite varied; for example, the economies of Germany, France and Finland demonstrate strength for a long-term period, while the economies of Greece, Portugal, Slovenia are weak and require additional support (Groux, Rady & Maniam, 2011). Contrastingly, the United States is more unified, both in terms of political regulation and in terms of financial soundness. American states share a common culture, common economic system, similar monetary and fiscal measures, and there are no such gaps between the financial viability of the U.S. states as there are between the countries of the Eurozone.

Thirdly, the research of Groux, Rady and Maniam (2011) shows that dollar as currency is advantageous because of high workforce mobility and reduced possibility of asymmetric financial shocks in the United States. For example, if some events damage the financial viability of one state, the workforce from this state will move to financially stronger states and the balance of labor supply and demand will be preserved. Furthermore, the interests of Eurozone countries are different and in case of an asymmetric shock the government of the affected country will likely act to support own country instead of benefiting the Eurozone as a whole. In the United States, such situation would be resolved at the federal level to achieve optimal outcomes for the whole country (Groux, Rady & Maniam, 2011).

Finally, the mechanisms of addressing financial shocks and crises in the United States are more efficient and more balanced compared to the Eurozone frameworks. The decisions related to providing financial assistance or easing monetary policy are done at the ECB level and require a lot of time and effort for implementation. These procedures in the United States are easier because of low political and economic dispersion in the country. For example, there are federal programs of unemployment assistance, Medicaid and assistance to local businesses in difficult economic situations (Rose & Dickens, 2012). In the Eurozone, the countries can also receive external assistance but the major load is on the internal budgets. In addition, economic issues and incorrect policies in the neighboring countries might aggravate economic shocks and slow down the rate of financial recovery (Rose & Dickens, 2012).

Regarding the interest rates, the tendencies indicate that the Fed will eventually start increasing interest rates, but currently it is reluctant to do that quickly. On one hand, the economy of the United States is experiencing debt drain due to increased borrowing and spending (Jaffe, 2011). The reliance on expansionary policy was reasonable as it allowed the United States to stimulate the processes of economic recovery and financial revival; at the same time, long-term interest rates in the country are kept at the record low level of 0.25% for 6 years already, and it is essential to raise interest rates in the future in order to avoid debt drain and to reduce budget deficits (Jaffe, 2011). This increase of interest rates is also important since the rates currently are at the record low level and if there emerges a need to use monetary easing, this instrument  be used for reviving the economy during recession and/or shocks. Therefore, when the economic growth becomes stronger, it would be necessary to increase interest rates.

The Fed’s decision in September 2014 was to keep interest rates at the low level for some more time; however, the Fed also announced a $10 billion cut of mortgage and Treasury bond purchases, anticipating that the economy will grow stronger in 2015 (Wiseman & Crutsinger, 2014). Such signals as the highest rate of job openings in the United States, anticipated GDP growth of 3.3% in 2015 (Wiseman & Crutsinger, 2014), strong dollar and leading position of the United States in the international market indicate that the Fed might start the policy of increasing interest rates and cutting spending in the near future (1-2 years).

Furthermore, the Fed announced that its short-term borrowing rate will increase to 1.38% in 2015 from 1.13% in 2014 (Wiseman & Crutsinger, 2014). Hence, it is reasonable to assume that current borrowing rates will remain low for 6 months-1 year, and after that time the Fed will gradually reduce spending and raise interest rates to address the issue of potential debt drain and to decrease budget deficit in the United States.

Do you like this essay?

Our writers can write a paper like this for you!

Order your paper here.

1 Star2 Stars3 Stars4 Stars5 Stars (No Ratings Yet)
Loading...