ABSTRACT
Europe has a powerful new symbol-the euro. What could better express the desire for an “ever closer union among the peoples of Europe” than a single joint money, replacing diverse francs, lire, and marks? Within a generation, a population will come of age knowing no other currency than the euro. Inevitably, citizens of the European Union (EU) will begin to feel themselves bound together more closely as part of the same social entity. Money, we know, can have a profound effect on how individuals see themselves and, therefore, how they see themselves in relation to others. Much like a flag or an anthem, money contributes to a sense of collective identityof belonging to a single community. Already Europeans speak of participating nations as a distinct unit, popularly known as “the euro zone” (or “Euroland”; officially the “euro area”). Europe’s sense of identity will never be the same. But can the euro do more? For many, ambitions have been even grander.
The aim was never just to help underwrite the integration project inside Europe. At least as importantly, it was to enhance Europe’s role on the world stage by creating a potent rival to the U.S. dollar, the dominant international money of the era. Resentment has long simmered among Europeans sensitive to the inordinate power that the greenback’s widespread popularity gives to the United States-America’s “exorbitant privilege,” in Charles de Gaulle’s memorable phrase. Europe is the equal of the United States in economic output and trade. Why should it not be America’s equal in monetary matters, too? Economic and Monetary Union (EMU) was also meant to challenge the dollar for global currency supremacy. Economist Charles Wyplosz (1999: 76) calls this “the hidden agenda of Europe’s long-planned adoption of a single currency.” Can the euro ever truly challenge the dollar? The purpose of this essay is to
explore prospects for the euro as an international currency. My assessment, which will disappoint many, is deeply skeptical. The euro will, of course, dominate monetary relations within the European region and may even extend its influence to some neighboring areas, such as the Mediterranean littoral or sub-Saharan Africa-what the European Central Bank, the ECB (2001), calls the “Euro-time zone.” As Wyplosz (1999: 89) remarks: “This is
the euro’s turf.” But elsewhere, for the foreseeable future, Europe’s new money is fated to remain a distant second to the greenback, however much many Europeans would prefer otherwise. There are four interrelated reasons for the euro’s dim prospects. First is
the persistent inertia, characteristic of all monetary behavior, which can be expected to inhibit any rapid market switch from the dollar to the euro. Second is the cost of doing business in euros, which is unlikely to decline to a level significantly below current transactions costs for the greenback. Third is an apparent anti-growth bias built into EMU, which will impact negatively on rates of return on euro-denominated assets. And fourth is the ambiguous governance structure of EMU, which sows doubt and confusion among prospective users of Europe’s new currency. Though none of these barriers is insurmountable, there is little sign that they will be overcome in the foreseeable future. Any challenge to the dollar, therefore, will be feeble at best.
