es, and encouraging a modern, global view.” There exists the possibility that the euro will become a major international reserve currency. Reserve currencies are use by central banks, governments, and private firms worldwide as long-term store of value and to meet their ongoing financial requirements. The dollar is currently the world’s premiere reserve currency. Historically only currencies that are highly liquid, stable, and accepted as payment in a large economic area have the potential to become major reserve currencies. Reserve currencies are highly demanded and therefore benefit from high liquidity and extremely low transaction cost in foreign exchange markets. Reserve currency status similarly benefits a nation’s securities markets, because buyers interested in holding a reserve currency buy assets denominated in that currency. This in turn lowers the cost of borrowing for firms and governments raising money in that currency. The advantages of having a currency, which is used as a unit of account and a medium of exchange in the rest of the world, are significant. There are two benefits. First, when a currency is used internationally, the issuer of that currency obtains additional revenues. For example, in 1999 more than half of the dollars issued by the Federal Reserve were used outside of the USA. This doubles the size of the balance sheet of the Federal Reserve. Therefore the profits double and go on directly to the US government. In turn citizens enjoy the benefits of the worldwide use of the dollar in the form of lower taxes needed to finance a given level of government spending. If the euro reaches the same level as the dollar, citizens of Euroland will enjoy similar benefits. Also if the euro becomes an international currency, activity will boost for domestic financial markets. “Foreign residents will want to invest in assets and issue debt in that currency. As a result, domestic ba...
