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Emerging Nations Dumping Euro Reserves

Monday, April 08, 2013
By Dr. Rakesh Singh

Paves way for the continuing dominance of the dollar in the global currency reserve markets.

Dr. Rakesh Singh is Director, Durgadevi Saraf Institute of Management Studies, Mumbai.

According to a report in Financial Times, emerging nations are dumping euro reserves from their official currency. IMF estimates that in 2012 central banks in developing countries sold around 45 billion Euros, cutting their Euro reserve by 8%. The Euro, it may be recalled, was introduced once as a combined dream of European leaders as a challenge to the dollar as a dominant currency.

But today, emerging economies that are defining the new world have reduced their Euro reserve from 31% on average to 24%. This is the lowest since 2004. The choice of holding a reserve currency depends upon whether it is regarded a standard unit of account and is safe, liquid and stable. Even amidst a crisis, the Dollar has held its position and around 60% of all reserve currency is held in dollars in emerging markets. The world is also moving towards a multicurrency reserve system as China gradually is successful in expanding the international role of its Remnibi.

The big question is whether: Will the euro survive as an important reserve holding currency amidst this global as well as euro crisis. Or the logic of economics will catch up with euro and this will make euro a least preferred currency. Theoretically the Eurozone still makes the euro competitive as a reserve currency. It is one of the largest trading blocs today and has fairly good returns as compared to other advanced economies. Some optimists believe that Europe despite the current asymmetric crisis will become stronger and stronger in the years to come.

One of the requirements of a currency to be a preferred global reserve is the stability of the financial and economic system. The Eurozone is the slowest growing region. Eurozone markets are no longer as deeply liquid or stable, primarily due to the concern about the creditworthiness of Greece, Spain, Italy and Cyprus. The degree of financial integration within Eurozone has seen a steady decline and that too, at the time when this integration had to be strengthened to keep the Eurozone alive.

The Greek crisis in the beginning of this year forced German Chancellor Angela Merkel to press for a fiscal monetary and banking union within the Eurozone. But the difficulty of bringing a fiscal union in the Eurozone was compounded by the heterogeneity in the levels of development and also in terms of crisis. No monetary union will work in the absence of a fiscal union. But a Fiscal union is not possible as nations may lose their sovereignty. This leaves the question as to what happens to banking union.

Today each Eurozone country is responsible for their banking system; integration of banks will now be a past history. Like Cyprus the entire crisis stricken European economy will start imposing capital control. There is no scope for bailing shareholders, bondholders and deposit insurers as the Eurozone has no banking union. Logical economics will lead to disintegration of the European Union and the euro will further decline in importance as a global reserve currency.

On the other hand The US economy scores high on all the counts. It still has a deep and sound financial system. The goldmine in terms of shell gas has cut its cost of businesses by leaps and bound. Its efficient rail network and its ability to attract best talents from across the world are paving way for its dominance in the global currency reserve markets.

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