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Mars or Mercury? The geopolitics of international currency choice

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Listed:
  • Barry Eichengreen
  • Arnaud Mehl
  • Livia Chiţu
  • Thorsten Beck

Abstract

SummaryWe assess the role of economic and security considerations in the currency composition of international reserves. We contrast the 'Mercury hypothesis' that currency choice is governed by pecuniary factors familiar to the literature, such as economic size and credibility of major reserve currency issuers, against the 'Mars hypothesis' that this depends on geopolitical factors. Using data on foreign reserves of 19 countries before World War I, for which the currency composition of reserves is known and security alliances proliferated, our results lend support to both hypotheses. We find that military alliances boost the share of a currency in the partner's foreign reserve holdings by about 30 percentage points. These findings speak to the implications of possible US disengagement from global geopolitical affairs. In a hypothetical scenario where the United States withdraws from the world, our estimates suggest that long-term US interest rates could rise by as much as 80 basis points, assuming that the composition of global reserves changes but their level does not.

Suggested Citation

  • Barry Eichengreen & Arnaud Mehl & Livia Chiţu & Thorsten Beck, 2019. "Mars or Mercury? The geopolitics of international currency choice," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 34(98), pages 315-363.
    • Handle: RePEc:oup:ecpoli:v:34:y:2019:i:98:p:315-363.
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    File URL: http://hdl.handle.net/10.1093/epolic/eiz005
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    Cited by:

    1. Ambrocio, Gene & Hasan, Iftekhar & Li, Xiang, 2023. "Global political ties and the global financial cycle," IWH Discussion Papers 23/2023, Halle Institute for Economic Research (IWH).
    2. Michael D. Herley & Lucjan T. Orlowski & Mark A. Ritter, 2024. "US Dollar Exchange Rate Elasticity of Gold Returns at Different Federal Fund Rate Zones," Economies, MDPI, vol. 12(9), pages 1-10, August.
    3. Mateane, Lebogang, 2023. "Risk preferences, global market conditions and foreign debt: Is there any role for the currency composition of FX reserves?," Research in Economics, Elsevier, vol. 77(3), pages 402-418.
    4. Barry Eichengreen & Camille Macaire & Arnaud Mehl & Eric Monnet & Alain Naef, 2024. "Currency internationalization with Chinese characteristics: Is capital‐account convertibility required for the renminbi to acquire reserve‐currency status?," International Finance, Wiley Blackwell, vol. 27(2), pages 102-128, August.
    5. Felipe Benguria & Dennis Novy, 2025. "How to Grow an Invoicing Currency: Micro Evidence from Argentina," CESifo Working Paper Series 11964, CESifo.
    6. Aizenman, Joshua & Cheung, Yin-Wong & Qian, XingWang, 2020. "The currency composition of international reserves, demand for international reserves, and global safe assets," Journal of International Money and Finance, Elsevier, vol. 102(C).
    7. Barry Eichengreen, 2024. "International Finance and Geopolitics," Asian Economic Policy Review, Japan Center for Economic Research, vol. 19(1), pages 84-100, January.
    8. Lorenz Emter & Peter McQuade & Swapan-Kumar Pradhan & Martin Schmitz, 2024. "Determinants of currency choice in cross-border bank loans," BIS Working Papers 1184, Bank for International Settlements.
    9. Agustin S. Benetrix & Beren Demirolmez, 2025. "Mapping Global Debt: A New Measure of Currency Dominance and Uncertainty Shock Effects," Trinity Economics Papers tep0925, Trinity College Dublin, Department of Economics.
    10. Gergely Hudecz & Edmund Moshammer & Alexander Raabe & Gong Cheng, 2021. "The euro in the world," Discussion Papers 16, European Stability Mechanism, revised 27 Oct 2021.
    11. Eichengreen, Barry, 2024. "Geopolitics and the global economy," Journal of International Money and Finance, Elsevier, vol. 146(C).
    12. Marco Garofalo & Giovanni Rosso & Roger Vicquéry, 2025. "Sanctions and Currencies in Global Credit," Economics Series Working Papers 1079, University of Oxford, Department of Economics.
    13. Laser, Falk Hendrik & Weidner, Jan, 2020. "Currency compositions of international reserves and the euro crisis," Darmstadt Discussion Papers in Economics 238, Darmstadt University of Technology, Department of Law and Economics.
    14. Colin Weiss, 2022. "Geopolitics and the U.S. Dollar's Future as a Reserve Currency," International Finance Discussion Papers 1359, Board of Governors of the Federal Reserve System (U.S.).
    15. Boris Podobnik & Dorian Wild & Dejan Kovac, 2025. "Cutting the Geopolitical Ties: Foreign Exchange Reserves, GDP and Military Spending," Papers 2507.05856, arXiv.org.
    16. Albalate, Daniel & Bel, Germà & Mazaira-Font, Ferran A. & Ros-Oton, Xavier, 2024. "Paying for protection: bilateral trade with an alliance leader and defense spending of minor partners," Journal of Economic Behavior & Organization, Elsevier, vol. 223(C), pages 234-247.
    17. De Bromhead, Alan & Jordan, David & Kennedy, Francis & Seddon, Jack, 2021. "How does international monetary leadership end? The Sterling Area revisited," QUCEH Working Paper Series 21-02, Queen's University Belfast, Queen's University Centre for Economic History.
    18. Alan de Bromhead & David Jordan & Francis Kennedy & Jack Seddon, 2023. "Sterling's farewell symphony: The end of the Sterling Area revisited," Economic History Review, Economic History Society, vol. 76(2), pages 415-444, May.
    19. Eichengreen, Barry & Macaire, Camille & Mehl, Arnaud & Monnet, Eric & Naef, Alain, 2022. "Is Capital Account Convertibility Required for the Renminbi to Acquire Reserve Currency Status?," CEPR Discussion Papers 17498, C.E.P.R. Discussion Papers.
    20. Paul J. J. Welfens & Tian Xiong, 2019. "Correction to: BREXIT perspectives: financial market dynamics, welfare aspects and problems from slower growth," International Economics and Economic Policy, Springer, vol. 16(1), pages 267-267, March.
    21. Janus, Jakub, 2021. "The COVID-19 shock and long-term interest rates in emerging market economies," Finance Research Letters, Elsevier, vol. 43(C).
    22. Alina Iancu & Gareth Anderson & Sakai Ando & Ethan Boswell & Andrea Gamba & Shushanik Hakobyan & Lusine Lusinyan & Neil Meads & Yiqun Wu, 2022. "Reserve Currencies in an Evolving International Monetary System," Open Economies Review, Springer, vol. 33(5), pages 879-915, November.
    23. Barry Eichengreen & Arnaud Mehl & Livia Chițu, 2021. "Mars or Mercury redux: The geopolitics of bilateral trade agreements," The World Economy, Wiley Blackwell, vol. 44(1), pages 21-44, January.
    24. Norring, Anni, 2024. "Geoeconomic fragmentation, globalization, and multilateralism," BoF Economics Review 2/2024, Bank of Finland.
    25. Liu, Ziheng & Zhang, Jiahui & Gu, Ran & Hu, Qizheng & He, Shouchao, 2025. "Driving effects of U.S. monetary policy and geopolitical risks on gold reserve share," International Review of Financial Analysis, Elsevier, vol. 105(C).

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    Keywords

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    JEL classification:

    • F0 - International Economics - - General
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • N0 - Economic History - - General
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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