ABSTRACT
How will enlargement of the European Union (EU) affect prospects for the euro as an international currency? Will the addition of a dozen or possibly even more new members to the Economic and Monetary Union (EMU) enhance the euro’s ability to challenge the U.S. dollar for global monetary supremacy? Previously, I have argued that Europe’s joint currency is fated to remain a distant second to America’s greenback long into the foreseeable future (Cohen 2003). In this essay I extend my earlier analysis to consider the impact of enlargement on the euro’s international role. My conclusion now is, if anything, even more skeptical than before. Enlargement, I submit, will diminish, not expand, the euro’s attractiveness as a rival to the greenback. The dollar will remain the only truly global currency. To date, progress in building a global role for the euro has been under-
whelming. To some extent, this might be due simply to the inertia that is inherent in all monetary behavior-a well-documented stickiness in currency preferences. Since the adoption of a new money is costly, involving an expensive process of adaptation, an already popular currency like the dollar enjoys a certain natural advantage of incumbency. My previous work, however, suggests that there are also more fundamental forces at work. Three factors, all structural in character, have been largely responsible for the euro’s slow start as an international currency: relatively high transactions costs, due to inefficiencies in Europe’s financial markets; a serious anti-growth bias built into the institutions of EMU; and, most importantly, ambiguities at the heart of the monetary union’s governance structure. The analysis offered here suggests that adding new members to EMU will, if anything, simply make matters worse. Larger numbers will aggravate the negative impact of all three factors. Of particular salience is the impact of enlargement on the governance
structure of EMU. I am hardly alone in stressing the degree to which prospects for internationalization of the euro are dimmed by EMU’s institutional inadequacies. The theme has featured in the work of economists (e.g. Eichengreen 1998) and political scientists (e.g. Bieling 2006) alike. From the start, it should have been clear that widespread acceptance of Europe’s new currency would be retarded by a lack of clarity about the delegation of
monetary authority among governments and EU institutions. My argument here is that the addition of a diverse collection of new members, with significantly different interests and priorities, can only make the challenge of governance worse, exacerbating ambiguity at the expense of transparency and accountability. The organization of the essay is as follows: The first two sections set the
stage for analysis. The first section reviews the story of the euro’s internationalization to date, while the second outlines prospects for enlargement of EMU and what the addition of new members could mean for the currency’s future. The main analysis then follows in three subsequent sections, addressing in turn the impact of enlargement on each of the three structural factors identified in my previous work. The results and implications of the analysis are summarized in a concluding section.
