The euro was born out of America's abuse of the dollar's supremacy in the global financial system. The single currency will challenge that supremacy, but will still benefit America. And until the euro acquires a political voice, Europe will continue to play a support role to the US in world affairsby Martin Walker / January 20, 1999 / Leave a comment
Published in January 1999 issue of Prospect Magazine
As the euro is born, Europe’s political class worries about its immediate prospects. Will it be “hard” or “soft”? What form of economic governance will it require? When will “outs” become “ins”? But there are also strategic questions which attend the euro’s birth, in particular the impact it is likely to have on relations between the two richest and most powerful entities on the planet-the US and the European Union.
It is too easily forgotten that one of the main inspirations behind the euro was the resentment felt by most of Europe over the US’s misuse of the dollar’s supremacy in the global financial system. The story begins with the Tet offensive in that extraordinary spring of 1968. The Vietnam war was creating balance of payments trouble for the US, which it met by exporting dollars to Europe. The Tet offensive delivered a serious blow to US arms, and led to President Johnson’s decision not to seek re-election. He also refused to deepen US opposition to the war by raising taxes to pay for it. Thus, the rising cost of the war led to a federal budget deficit of $24.2 billion in 1968, more than the total deficits of the previous five years.
Europeans felt that they were financing US budget deficits and suffering the consequences of the export of US inflation, while at the same time seeing their companies bought up by the export of US capital. This was the period when Jean-Jacques Servan-Schreiber’s polemic Le D?fi American (The American Challenge) became a bestseller across a Europe in which anti-Americanism was made respectable by the Vietnam war and race riots in US cities.
Charles de Gaulle’s response was to send the dollars back to the US and demand gold in return. In the single month of November 1967, when devaluation of the British pound began to destabilise the Bretton Woods system, the “gold pool” had to sell $700m to hold the price. Two days later, De Gaulle announced that France would no longer participate in the pool, and the US was forced to stop selling gold into the free market. Only central banks were now permitted to buy the metal. The system, however, was still vulnerable to political storms.