behind China and Germany in terms of its position as the leading exporter of manufactures to the world. And, more recently, a major credit rating agency downgraded the US credit rating because of a perceived lack of a credible plan for fiscal consolidation to stabilize the government's medium-term debt dynamics.

A slower pace of economic growth over the medium-term, which is now being projected by the OECD, the IMF and the World Bank as well as private forecasters, will worsen the US’s debt dynamics.<sup>58</sup> Structural reforms and infrastructure investment are needed to avoid this “new normal” of slower growth. The main argument that has been put forward is that governments in advanced economies need to identify policies to raise long-term growth that also would stimulate demand over the short-term.<sup>59</sup> Undertaking infrastructure projects, improving the quality of education, and providing worker re-training to help the unemployed workers should receive particular attention in the US. The American Society of Civil Engineers assesses that the United States needs US$2.2 trillion of infrastructure spending during the next five years.<sup>60</sup> Several key countries in Europe face similar or worse fiscal challenges, along with the need for structural reforms and infrastructure investment. The European Commission estimates that Europe needs to invest €1.5- 2 trillion over the next decade in infrastructure in order for Europe to remain competitive. In addition to structural reforms, which include reforming anti-competitive product market regulations and entry barriers, balancing fiscal challenges with investment needs poses a difficult policy conundrum in a number of European economies.

Despite these somewhat subdued prospects, as discussed earlier in this paper, the dollar still accounts for more than 60 percent of total foreign exchange reserves, for about 40 percent of all international lending and bond issuance, and is involved in more than 80 percent of all foreign exchange transactions. The US economy continues to be the single largest economy in the world, a position that it is likely to retain for at least another decade. Therefore, on balance, unless US policy makers commit serious policy mistakes that could further hurt the country’s economic prospects and its credit rating, the US is likely to continue to remain a key global player with the dollar remaining a key reserve currency for at least another decade, though the US’s weight in the global economy as well as its fiscal and monetary capacity to provide much of the needed liquidity to a growing global economy, or implement countercyclical policies at the global level, are likely to continue to erode over time.

On a deeper structural level, there are complex political economy factors that may inhibit progress in securing structural reforms for sustained growth in the US. A number of recent analyses highlight issues of regulatory capture in the financial system<sup>61</sup> or political gridlock in the US Congress.<sup>62</sup> The necessary reforms are unlikely to be implemented unless these political barriers are overcome.

On the other hand, the economic and political challenges facing the euro are far greater than those facing the dollar. To be sure, the euro has many of the required attributes of an international currency and has gained importance as a reserve currency in both the private and official sectors. As of 2010, only a decade after its creation, the euro accounted for around 25 percent of official reserve holdings globally, 58 According to the World Bank (Global Economic Prospects, January 2012) OECD countries’ real GDP is projected to grow by 1.4 percent in 2011 and 1.3 percent in 2012 and less than 2 percent in 2013 compared to 2.8 percent in 2010. IMF in its latest projections (World Economic Outlook Update, April 2012) has similar figures for advanced economies – 1.6 percent, 1.4 percent and 2.0 percent for 2011, 2012 and 2013, respectively. OECD Economic Outlook (November, 2011) has similar figures for the OECD area: 1.9 percent, 1.6 percent and 2.3 percent for 2011, 2012 and 2013, respectively. For 2012, both the World Bank and the IMF are forecasting a recession for Europe in 2012 and only a modest growth (around 2 percent) for the US and Japan.

> 59 See Doemeland and Lin (2012) and Lin (2011) for a fuller discussion of these issues.

> 60 See the “Infrastructure Report Card” at www.infrastructurereportcard.org.

> 61 See, for example, Johnson and Kwak, 2010.

> 62 See, for example, Mann and Ornstein (2012, 2006).

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