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The events of this past year's Euro Crisis have upset not only the international balance of power between currencies but also the suspected future balance of those currencies. As the effects of the Great Recession hit debt-ridden countries like Greece and Portugal, worsening their economic prospects and compounding the effects of speculation-driven spending sprees, the viability of their sovereign debts began to fall question. These debts, denominated in euros, represented not only a threat to the value of the currency in the short term but also to the solvency of highly exposed banks all over Europe.
This systemic risk, and eventually systemic crisis, revealed the paradox of the Eurozone's partial integration: the interconnected nature of these economies had led to enough cross-national exposure that a collapse of one or more Eurozone economies threatened the entire system while at the same time the economies were not connected enough to free member states from different monetary policy needs. As Greece's import-export ratio worsened, the expansionary monetary policy it needed was off the table, worsening economic conditions and undermining any hope of paying off its sovereign debt. This dizzying combination of factors has led to dozens of proposed solutions, countless summits and negotiations, but only one near-universal conclusion: the euro system was plagued from the start and cannot be trusted as a stable alternative to the hegemonic dollar.
Since the mid-twentieth century, the dollar has enjoyed almost unrivaled status as the world's preferred reserve currency, or the currency in which most nations denominate most of their international currency reserves. The deep pool of relatively liquid assets denominated in dollars, from the multi-trillion dollar pool of US government securities to the securities of many large corporations, and perceived stability of the currency have given sovereign investors and countries engaged in international trade a large incentive to keep their currency reserves in dollars. For the past sixty or seventy years, this has allowed countries to park their holdings in a stable currency and reduce transaction costs in international HI trade. This same system has led the majority of international commodities markets, most notably the oil market, to price goods in dollars in order to take advantage of these lower transaction costs and facilitate the mechanisms of trade. In turn, the...