ABSTRACT
Even before Europe’s Economic and Monetary Union (EMU) came into existence nearly a decade ago, a brilliant future was predicted for the euro as an international currency. At last, many argued, the European Union (EU) would have a monetary unit that could challenge the global dominance of the U.S. dollar. Typical was the confident assertion of two prominent European economists that “the most visible effect of EMU at the global level will be the emergence of a second global currency” (Gros and Thygesen 1998: 373). The conventional wisdom was clear. Leadership in monetary affairs would no longer be the privilege of the United States alone. The currency system would now rest on two pillars, not one. Reality, however, has turned out to be quite different. There is no doubt
that the system has changed. The euro has firmly established itself as an international currency, smoothly taking its place as successor to Germany’s old Deutschmark (DM), which had already attained a rank second only to the dollar. The euro zone has grown from eleven members to, at time of writing, sixteen, with as many as a dozen or more set to join in the future. Yet the degree of change has been considerably smaller than expected. Euro enthusiasts assumed that once the tilt began a new two-currency system would naturally emerge. But this was based on a fundamental misunderstanding of the nature of monetary power. In fact, the euro’s success has been limited by structural constraints on Europe’s ability to project power in monetary affairs. The euro zone is largely a passive participant in global payments developments and remains a weak force in monetary diplomacy. In this essay we argue that the euro is not yet ready for prime time and,
at present, can play only a subordinate role in the global system as compared to the dollar. This can be described as a one-and-a-half currency systemcertainly not a two-pillar world. We address two critical questions. First, how has the global system been changed by the arrival of the euro? We elaborate on what is meant by a one-and-a-half currency system and discuss why the euro is still not ready for prime time. Second, what can Europe do to overcome the euro’s disadvantages and thus enhance the euro’s role as the second pillar of the international monetary system? We argue that the main imperative is to improve the bloc’s ability to project power effectively. Dual leadership at
the global level is not out of reach, but will require determined reform of the EMU’s governance structure.
