ABSTRACT

Much has been written about the implications of Economic and Monetary Union (EMU) for the future of the U.S. dollar. A merger of European currencies, it is said, will quickly challenge the hitherto predominant role of the dollar as an international currency. In the words of two of Europe’s most prominent monetary specialists, “The most visible effect of EMU at the global level will be the emergence of a second global currency once the [euro] becomes the common currency” (Gros and Thygesen 1992: 295). The general message is clear. Assuming EMU succeeds, the dollar will be threatened by a new and potentially powerful rival. In fact, such predictions seem excessively optimistic, if not wholly out of

touch with reality. They remind me of the standard definition of second marriages: the triumph of hope over experience. Europeans may wish, even pray, that their new currency will soon assume a global role. In practice, it will not be all that easy for the euro to dislodge the dollar from its historical place of honor. Europe’s new money will not become a global currency anytime soon. Indeed, even within the European region itself the euro will not be unchallenged, as the dollar will retain its attractiveness for many cross-border purposes. The real risk is that in trying to promote wider acceptance of the euro at the dollar’s expense, the European Union might generate a nasty policy confrontation with the United States. The challenge for officials on both sides of the Atlantic will be to effectively manage future competition between the euro and the dollar in the private marketplace.