Why the euro cannot realistically rival the dollarby Paul Wallace / January 5, 2019 / Leave a comment
The Brussels eurocrats should know better. Ahead of the tenth anniversary of the euro, born at the start of 1999, the European Commission celebrated the single currency’s “resounding success.” The monetary union was “an achievement of strategic importance” for the world at large by making Europe “a pole of macroeconomic stability.” The ensuing euro crisis brutally exposed the hollowness of these claims as the currency bloc nearly fell apart as well as weakening the global economy.
Undaunted, a decade later as the 20th anniversary approached, Jean-Claude Juncker set out the goal of strengthening the international role of the euro, as part of a broader mission to increase the European Union’s heft in the world. In his final “state of the union” speech last autumn the Commission’s president declared that “the euro must become the face and the instrument of a new, more sovereign Europe.”
Whether this vaulting ambition for the euro is that desirable is open to question. As long ago as the 1960s France took issue with the “exorbitant privilege” of the United States, owing to the dollar’s role in underpinning the international monetary system. In the era of floating exchange rates since the early 1970s, the main benefit for the US is lower borrowing costs thanks to foreign purchases of American safe assets. Yet that tends to keep the dollar stronger than would otherwise be the case. If the euro were genuinely to rival the dollar, eurozone businesses would have to cope with a stronger currency—rather than the weak one that has propped them up over the past few years thanks to the European Central Bank’s ultra-loose policies.
Whatever its pros and cons, Juncker’s exalted vision won’t happen. At first sight, the euro might appear to merit a more influential role. Europe’s monetary union has after all stuck together, expanding from an initial membership of 11 countries in January 1999 to the current rollcall of 19. The euro area has managed a continuing if uneven recovery since the double-dip recession between mid-2011 and early 2013, growing particularly fast in 2017. At market exchange rates, it is second only to the US in the size of its economy (though China will soon push it into third place). The euro is widely used beyond the confines of the currency club (such as in Montenegro) while countries like Denmark peg their currencies…