ABSTRACT
After nearly a century of dominance of the international monetary system, has the U.S. dollar finally met its match in the euro? For many observers, the prospect has long been self-evident. Even before Europe’s Economic and Monetary Union (EMU) came into existence in 1999, prominent economists such as George Alogoskoufis (later to become finance minister of Greece) and Richard Portes were predicting that “the fundamentals point toward a potentially large shift in favor of the euro” (Alogoskoufis and Portes 1997: 63). The joint currency of the European Union (EU) could legitimately aspire to join America’s greenback at the peak of global finance. Over the decade since the euro’s debut, Europe has seemed well on its way to becoming a new monetary power. The fate of the dollar appeared to be sealed following the collapse of America’s housing market in mid-2007, which triggered the greatest crisis in U.S. financial markets since the Great Depression. Appearances, however, can be misleading. In fact, the euro’s achievements
as an international currency have fallen disappointingly short of aspiration. Admittedly, the money has done well in exchange-rate terms. Market value soared from a low near $0.83 in mid-2002 to as high as $1.60 in mid-2008, before dropping back. But exchange rates are at best an imperfect indicator of a currency’s global standing. The real issue is not price but use: the extent to which the euro is being adopted by actors outside EMU for the standard functions of a medium of exchange, unit of account, or store of value. When it comes to international use, the shift in favor of Europe’s money has, for the most part, been anything but large. After an initial spurt of enthusiasm, interest in the euro actually appears now to have leveled off, even stalled, and so far seems confined largely to a limited range of markets and regions. Not even the present troubles of the U.S. financial sector, which have required massive government interventions and in some cases de facto nationalization, have sufficed to tip preferences away from the dollar. If anything, the crisis has ironically served to reinforce the greenback’s global dominance. In short, power configurations in currency relations have changed much
less than expected. The euro has successfully attained a rank second only to the greenback-but it remains, and is likely to remain, a quite distant second.
Without a determined effort by EMU authorities to promote their money’s role, any challenge to the dollar will remain modest at best. Would Europe dare to mount a direct challenge? No one really knows,
but the temptation will surely be great-particularly at a time when America’s financial stresses would seem to have heightened the greenback’s vulnerability. European policymakers understand the material benefits that would result from wider use of their currency. These include a sizable gain of seigniorage, which would accrue from increased foreign holdings of euros or euro-denominated assets, as well as a higher degree of macroeconomic flexibility that would derive from the ability to finance external deficits with Europe’s own money. In practical terms, it is difficult to imagine that EMU authorities will refrain entirely from trying to encourage a greater role for the euro. But that, in turn, could turn out to be a recipe for discord with the United States, which has never made any secret of its commitment to preserving the greenback’s worldwide dominance. An overt struggle for monetary leadership could become a source of sustained tensions in U.S.–European relations. The purpose of this essay is twofold: first, to review the euro’s global per-
formance to date; and, second, to explore the implications of a possible leadership struggle for monetary dominance in years to come. A careful look at a broad array of available data, spelled out in the first two sections of the essay, confirms the euro’s limited achievements in most international uses, falling far short of enthusiasts’ aspirations. A glimpse at future prospects for the dollar-euro rivalry, in the essay’s final section, confirms the possibility of U.S.–European tensions but, happily, suggests little risk of a destabilizing escalation into outright geopolitical conflict.
